What is the break-even point of the bathrobe department

Reference no: EM131477071

Question: The "Less Is More" company manufactures swimsuits. The company is considering expanding to the bath robes market. The proposed investment plan includes:

• Purchase of a new machine: The cost of the machine is $150,000 and its expected life span is 5 years. The terminal value of the machine is 0, but the chief economist of the company estimates that it can be sold for $10,000.

• Advertising campaign: The head of the marketing department estimates that the campaign will cost $80,000 annually.

• Fixed cost of the new department will be $40,000 annually.

• Variable costs are estimated at $30 per bathrobe but due to the expected rise in labor costs they are expected to rise at 5% per year.

• Each of the bathrobes will be sold at a price of $45 at the first year. The company estimates that it can raise the price of the bathrobes by 10% in each of the following years.

The "Less Is More" discount rate is 10% and the corporate tax rate is 36%.

a) What is the break-even point of the bathrobe department?

b) Plot a graph in which the NPV is the dependent variable of the annual production.

Reference no: EM131477071

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