Reference no: EM132977517

Question - Break-even Analysis

Q1. The Marvel Mfg. Company is considering whether to construct a new robotic production facility. The cost of this new facility is $600,000 and it is expected to have a six-year life with annual depreciation expense of $100,000 and no salvage value. Annual sales from the new facility are expected to be 2,000 units with a price of $1,000 per unit Variable production costs are $600 per unit, while fixed cash expenses are $80,000 per year.

a. Find the accounting and the cash break-even units of production.

b. Will the plant make a profit based on its current expected level of operations'?

Q2. Family Security is considering introducing tiny GPS trackers that can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates might be off by 10% (either above or below), associated with this new product are:

Unit price: $125

Variable costs: $75

Fixed costs: $250,000 per year

Expected sales: 10,000 units per year

Since this is a new product line, you are not confident in your estimates and would like to know how well you will fare if your estimates on the items listed above are 10% higher or 10% lower than expected.

Assume that this new product line will require an initial outlay of $1.25 million. with no working capital investment, and will last for 10 years, being depreciated down to zero using MACRS 7 years depreciation. In addition, the firm's required rate of return or cost of capital is 9.75%, while the firm's marginal tax rate is 34%. Calculate the project's NPV under the "best-case scenario"(that is, use the high estimates---unit price 10% above expected, variable costs 10% less than expected, fixed costs 10%less than expected, and expected sales 10% more than expected).

Calculate the project's NPV under the "worst-case, Best Case and Base Case scenarios." and report your analysis in a table.