Otobai is considering still another production method for its electric scooter. It would require an additional investment
Question:
Otobai is considering still another production method for its electric scooter. It would require an additional investment of ¥15 billion but would reduce variable costs by ¥40,000 per unit. Other assumptions follow Table 10.1.
a. What is the NPV of this alternative scheme?
b. Draw break-even charts for this alternative scheme along the lines of Figure 10.1.
c. Explain how you would interpret the break-even figure. Now suppose Otobai’s management would like to know the figure for variable cost per unit at which the electric scooter project in Section 10.1 would break even. Calculate the level of costs at which the project would earn zero profit and at which it would have zero NPV.
Years 1-10 Year o Investment 15 1. Revenue 37.5 2. Variable cost 30 3. Fixed cost 4. Depreciation 5. Pretax profit (1 – 2 – 3 – 4) 6. Tax 7. Net profit (5 – 6) 8. Operating cash flow (4 + 7) 1.5 1.5 1.5 3 Net cash flow -15 +3
Step by Step Answer:
a b Note that the breakeven point can be found algebraically as follows Set NPV equal to ze...View the full answer
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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