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.
Students also viewed these Corporate Finance questions
-
Explain how you would interpret a variable overhead spending variance?
-
Explain how you might interpret these outcomes for partial r: a. r1y = .70 and r1y.2 = .69 b. r1y = .70 and r1y.2 = .02 c. r1y = .70 and r1y.2 = -.54 d. r1y = .70 and r1y.2 = .48
-
The Smith Company management would like to know the total sales units that are required for the company to earn a profit of $150,000. The following data are available: unit selling price of $50;...
-
YOU have just graduated from Deakin as an accounting and finance graduate. During your time at Deakin, you were organized and diligent with your studies and thus graduated with flying colors. This...
-
An electron de-excites from the fourth quantum level in the diagram of the preceding question to the third and then directly to the ground state. Two photons are emitted. How does the sum of their...
-
Use Apples financial statements in Appendix A to answer the following. 1. Is Apples statement of cash flows prepared under the direct method or the indirect method? 2. For each fiscal year 2017,...
-
A statistician is designing a phase III clinical trial comparing a continuous outcome in two groups receiving experimental versus standard therapy with a total sample size of 168 patients. The team...
-
Mr. Carter is the manager of Simmons Farm and Seed Company, a wholesaler of fertilizer, seed, and other farm supplies. The company has been successful in recent years primarily because of great...
-
Many of you have worked for or experienced various types of leaders. Identify one major quality you believe makes a good leader and explain how this quality interrelates to one values? Please explain...
-
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five- year period. His annual pay raises are determined by his division's...
-
Otobai?s staff has come up with the following revised estimates for the electric scooter project: Conduct a sensitivity analysis. What are the principal uncertainties in the project? Pessimistic...
-
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $10 million and the company expects to sell its old equipment for $1...
-
Use the Chain Rule to find dz/dt or dw/dt. z = sin x cos y, x = t , y = 1/t
-
The S&P 500 Index closed at 2863.39 on April 28 and closed at 2939.51 on April 29. Calculate the continuously compounded return on the index from April 28 to April 29.Answer to the nearest hundredth...
-
If the risk rate of the return is 4%, the return on the market portfolio is 12%, the beta of the hotel norwood is 1.5, what is the expected rate of the return for hotel norwood?
-
What performance metric of those listed below is the safest to use in order to determine performance of an organization and why? Explain. Net Income, Cash Flow From Operations, EBITDA
-
The GAAP regulations allow for variations in reporting financial data. What is the purpose of these options? There has also are been discussion to replace the GAAP with IFRSstandards.Discuss.
-
All financial institutions, to varying degrees, are exposed to credit, interest rate, liquidity, foreign exchange, and operating risks. Briefly and clearly define each.
-
What itre the reengineering tools suggested in the textbook?
-
The process of collaborative goal setting by a manager and subordinate, the extent to which goals are accomplished is a major factor in evaluating and rewarding the subordinate's performance. It is...
-
What are the usual estimates of returns to education in developing countries? How can we measure these returns? What is the potential problem with simple OLS (ordinary least squares) regression of...
-
A firm has a debt-to-equity ratio of .5 and a market-to-book ratio of 2. What is the ratio of the book value of debt to the market value of equity?
-
A firm has a long-term debtequity ratio of .4. Shareholders equity is $1 million. Current assets are $200,000, and the current ratio is 2. The only current liabilities are notes payable. What is the...
-
a. In late 2020, the market value of the shares of Citigroup was less than book value per share. How would you interpret this pattern? b. At the same time, Apples market value per share was about 20...
-
The highest WACC is 11%, the baseline WACC is 7.4% and lowest WACCS is 2.8%. To derive a WACC that better accounts for extreme scenarios, you decide to assign the following probability weights: High-...
-
Give 2 examples of the ff: Statutory law Regulatory law Common law Include the title of each example and explain why you chose these examples ( 1 to 2 sentences ) . Note: Write your reference ( s )
-
The Adams family includes a financially well-informed couple, both aged 36, and two children aged 4 and 6. The family is financially sound but suffered badly during the tech meltdown in 2000. The...
Study smarter with the SolutionInn App