Costco Ltd. purchased a $5,500,000 machine to produce highquality laptops. The machine can be used for...
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Costco Ltd. purchased a $5,500,000 machine to produce highquality laptops. The machine can be used for 10 years and is depreciated at a 20% CCA rate. We assume that no NWC is required. The machine can be sold for $100,000 in 10 years, with no other assets. The number of laptops that can be produced and sold per year is 2,500, and the sales price per laptop is $1,800. Use the following information to answer the questions: Variable costs account for 60% of total revenues per year Fixed costs per year = $120,000 Tax rate = 35% Discount rate = 8% 1. calculate the NPV of this investment. 2. if the price per laptop is $1,500, and variable costs are 70% of sales, recalculate the NPV. What can you conclude based on this analysis? 3. if the machine is depreciated on a straightline basis, what must be the minimum price per laptop for the company to receive any accounting profits? What must be the minimum price per laptop for the company to receive any economic profits? 4. Explain the differences between the accounting breakeven point and the economic breakeven point. 5. if the tax rate is higher than 35%, how your answers for part (c) will change and why? 6. If the machine is depreciated on a straightline basis, what is the firm's degree of operating leverage?
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1 Calculate the NPV of this investment To calculate the Net Present Value NPV we need to find the present value of all cash flows associated with the investment Step 1 Calculate the annual cash flows ... View the full answer
Related Book For
The Economics of the Environment
ISBN: 9780321321664
1st edition
Authors: Peter Berck, Gloria Helfand
Posted Date:
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