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Illustrate the procedure of break-even analysis based on NPW?
The break-even analysis determines the point of output where the total cost is equal to total revenue. It determines the required revenue to cover the total variable cost and fixed cost.
The break-even point can be calculated using the succeeding formula.
Step by step
Solved in 3 steps with 1 images
- If we think the investment is sensitive to annual revenues, what is its breakeven point for the project?What are the Flaws in Project Ranking by IRR?You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What will the free cash flow for this project be in year 2? Multiple Choice $53,000 $102,450 $107,250 $49,950
- Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.70 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations. Design A will require 12 hours of lathe time and 5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 8 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. Solve, a. Which design should be adopted if 125,000 units are sold each year? b. What is the annual saving over the other design?Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.70 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations. Design A will require 12 hours of lathe time and 5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 8 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. Which design should be adopted if 250,000 units are sold each year? What is the annual saving over the other design?The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $265,000 at the end of each of the next two years. At the end of the third year, the company will receive payment of $625,000. The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $575,000 at the end of the first year followed by a cash payment of $625,000 at the end of the second year. Use the IRR rule to show the (approximate) range of opportunity costs of capital at which the company should work the extra shift Please answer fast I give you upvote
- Diagramtically explain the break even analysis and its practical importanceChoose True or False for each of the following statements: 1. Sensitivity analysis is concerned with determining how much variation infinancial data, the decision maker can have to affect the economic decision. 2. Useful life is a period of time that yields the minimum equivalent uniformannual cost of owning and operating as asset. 3. Depreciation is a reduction in value of an asset, which reflects its actualusage during ownership. 4. In an optimistic estimation of MARR, we expect to see a lower MARR thanthat of pessimistic. 5. If one of extreme FW values, i.e., optimistic and pessimistic scenarios, ofan alternative is positive and another one is negative, a go-decision ismade without further analysis. 6. Recovery period refers to the depreciable life of an asset. 7. Spider plot is used to show the amount of changes on the value of morethan one factor at a time. 8. The book value at the end of useful life might not be equal to the salvagevalue when declining balance with switchover to…What are the benefits of NPW analysis?
- Michelin is considering going ‘‘lights-out’’ in the mixing area of the business that operates 24/7. Currently, personnel with a loaded cost of $590,000per year are used to manually weigh real rubber, synthetic rubber, carbon black, oils, and other components prior to manual insertion in a Banbary mixer that provides a homogeneous blend of rubber for making tires (rubber products). New technology is available that has the reliability and consistency desired to equal or exceed the quality of blend now achieved manually. It requires an investment of $2,250,000, with $93,000 per year operational costs and will replace all the manual effort described above. The planning horizon is 8 years, and there will be a $275,000 salvage value at that time for the new technology. Marginal taxes are 25%, and the after-tax MARR is 10%. The new investment relates to the 7-Year Property Class. Part a Determine the annual cost of purchasing the new technology. $enter a dollar amount Carry all interim…1. Compute the selling price if the contribution margin percentage is 25% and contribution margin per unit is P25, 000. P100, 000 P62, 500 P75, 000 P6, 250 2. Compute the breakeven point in peso if the contribution margin ratio is 0.4 and total fixed cost is P14, 000, 000. P35, 000, 000 P5, 600, 000 P40, 600, 000 P56, 000, 000 3. To solve for the contribution margin, we get the difference of Sales and Variable expenses Sales and Selling expenses Sales and Administration expenses Sales and Fixed expensesA financial investor has an investment portfolio. A bond in her investment portfolio will mature next month and provide her $25,000 to reinvest. The choices for reinvestment have been narrowed to the following two options:Option 1: Reinvest in a foreign bond that will mature in one year. Thistransaction will entail a brokerage fee of $150. For simplicity, assume thatthe bond will provide interest over the one-year period of $2,450, $2,000, or $1,675 and that the probabilities of these occurrences are assessed to be 0.25, 0.45, and 0.30, respectively.Option 2: Reinvest in a $25,000 certificate with a savings and loan association.Assume that this certificate has an effective annual rate of 7.5%.Which form of reinvestment should the investor choose in order to maximize her expected financial gain?