What is the break- even point of the bathrobe department

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Reference no: EM132710749

The Mount Hill company manufactures swimsuits. The company is considering expanding to the bathrobe 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 machine will be depreciated to zero salvage value, but the chief economist of the company estimates that it can be sold for $20,000 at the end of 5 years.
Advertising campaign: The head of the marketing department estimates that the campaign will cost $80,000 annually.
Fixed costs: Incremental fixed costs of the new department will be $40,000 annually.
Variable costs: First- year variable costs are estimated at $30 per bathrobe, but due to the expected increase in labor costs, they are expected to rise at 5% per year.
Price per bathrobe: 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 Mount Hill discount rate is 10%, and the corporate tax rate is 36%.

Problem a. What is the break- even point of the bathrobe department (what is the minimal number of units it needs to sell so the expansion is profitable)?

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

Reference no: EM132710749

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