Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city
Question:
Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of ¥15 billion. The cost of capital is 10%. The initial investment can be depreciated on a straight-line basis over the 10-year life of the project. Profits are taxed at a rate of 50%. Consider the following project estimates: Market size 1.0 million Market share .1 Unit price ¥ 375,000 Unit variable cost ¥ 300,000 Fixed cost ¥ 3 billion 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.
a. What is the NPV of this alternative scheme?
NPV ¥ billion =
b. What is the break-even quantity?
Break-even quantity =
c. Now go back to the original project shown in the problem table prior to the additional investment. Suppose Otobai's management would like to know the figure for variable cost per unit at which the original electric scooter project would break even. Calculate the level of variable costs at which the project would earn zero profit and at which it would have zero NPV.
Zero profit $ =
Zero NPV $ =
d. Calculate DOL based on the alternative scheme used in part a.
Essentials of Business Analytics
ISBN: 978-1285187273
1st edition
Authors: Jeffrey Camm, James Cochran, Michael Fry, Jeffrey Ohlmann , David Anderson, Dennis Sweeney, Thomas Williams