Reference no: EM132944555

Your company makes swimsuits. They are considering expanding into the bathrobe market. The proposed plan includes the following:

• Purchase of a new machine: the cost of the machine is $150,000 and its expected life span is 5 years. The terminal value is 0, but the chief economist estimates that it can be sold for $10,000 at the end of year 5.
• Ad campaign: the head of the marketing department estimates that the campaign will cost $80,000 annually.
• The fixed cost of the new department will be $40,000 annually.
• Variable costs are estimated at $30 per bathrobe but because of the expected rise in labor costs they are expected to rise at 5% per year.
• Each of the bathrobe will be sold at $45 in the first year. The company estimates that the price can be raised by 10% in each of the following year.
• The company has a discount rate of 10% and tax rate of 36%.

Problem a. What is the breakeven point of the bathrobe department (at what level of annual production will the NPV=0)?

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