Suppose Snowmobile Inc. is considering whether or not to launch a new snowmo bile. It expects to sell the vehicle for $10,000 over five years at a rate of 100 per year. The variable costs of making one unit are $5,000, and the fixed costs are expected to be $125,000 per year. The investment would be $1 million and would be depreciated according to the straight-line method over five years with zero salvage value. Snowmobile Inc.'s cost of capital is 10 percent. The corporate tax rate is 40 percent. The investment would not require any significant addition to the firm's working capital requirement.
a. What is the net present value of the investment?
b. How many snowmobiles would the company need to sell to break even (i.e., for the project to have a zero net present value)?
c. At the break-even level, what would be the project's discounted payback period and internal rate of return?

  • CreatedMarch 27, 2015
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