Reference no: EM132798251
1. Pill Ltd. has just purchased a $5,500,000 machine to produce big-screen TVs. The machine can be used for 10 years and is depreciated at a 20% CCA rate. For simplicity, we assume that no NWC is required. The machine can be sold for $100,000 in 10 years, and there are other assets remaining in its asset class. The number of TVs that can be produced and sold per year is 2,500, and the sales price per TV is $1,800. Use the following information to answer the questions:
Variable costs account for 60% of total revenues per year
Fixed costs per year = $120,000
Tax rate =35%
Discount rate = 8%
(a) Calculate the NPV of this investment for Pill.
(b) If the price per TV is $1,500, and variable costs are 70% of sales, re-calculate the NPV. What can you conclude based on this analysis?
(c) If the machine is depreciated on a straight-line basis, what must be the minimum price per TV for the company to receive any accounting profits? What must be the minimum price per TV for the company to receive any economic profits?
(d) Explain the differences between the accounting break-even point and economic break-even point.
(e) If the tax rate is higher than 35%, how your answers for part (c) will change and why?
(f) If the machine is depreciated on a straight-line basis, what is the firm's degree of operating leverage?
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