Paper Christmas Trees Inc. is considering introducing a new line of inexpensive Christmas trees. The initial outlay

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Paper Christmas Trees Inc. is considering introducing a new line of inexpensive Christmas trees. The initial outlay for the project is $175,000, and the company will have to invest $5,000 in working capital and $10,000 in fixed assets each year during the six year life of the project. The initial outlay will be depreciated assuming a salvage value of $0. Annual depreciation and amortization charges for the project will be $15,000 and cash-related fixed costs will be $6,000 per year. The firm will sell each tree for $75, and the variable cost to produce each tree will be $40. Calculate the number of trees that the firm must produce and sell in order to breakeven economically. Assume that the appropriate cost of capital for the project is 15 percent and that the marginal tax rate for the firm is 40 percent?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Fundamentals of Corporate Finance

ISBN: 978-1118845899

3rd edition

Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates

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