A project has an initial cost of $36,000 for equipment, which will be depreciated straight-line to zero over the five-year life of the project. There is $2,000 salvage value on the equipment. No working capital is required. Sales are estimated at 10,000 units at a selling price of $32.50 per unit. Variable costs are $14.50 and total fixed costs are $56,000. The tax rate is 35% and the required rate of return is 10%.

a) For every$4increase in the variable cost per unit (that is, we increase the variable cost from $14.5 to $18.5), what will be the change to the net present value? 

b) If the total fixed cost increase by $10,000, what is the change to the net present value? 

Answer rating: 100% (QA)

We can use the net present value NPV formula to solve this problem NPV Initial Investment PV of Future Cash Flows Where the PV of Future Cash Flows PV ... View the full answer