Problem 10-12 Break-even analysis and operating leverage

Otobai is considering still another production method for its electric scooter. It would require an investment of 15.60 billion in addition to the initial investment of 15.60 billion but would reduce variable costs by 52,000 per unit. The cost of capital was assumed to be 14%. The total investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%.

Consider the following estimates for the scooter project.

Market size			1.12	million
Market share			.1
Unit price			435,000.0
Unit variable cost			360,000.0
Fixed cost			3.12	billion

Assume investment is depreciated over 10 years straight-line and income is taxed at a rate of 50%.

a.	What is the NPV of this alternative scheme?(Do not round intermediate calculations. Enter your answer in billions. Round your answer to 2 decimal places.)

Net present value

billion

b.	Calculate the break-even point.(Do not round intermediate calculations. Round "PV Factor" to 6 decimal places and the finalanswer to the nearest whole number.)

Break-even point

d.

Consider the following Preliminary cash-flow forecasts for Otobais electric scooter project (figures in billions). Calculate the variable cost per year at which the electric scooter project would break even. Assume that the initial investment is 15.60 billion. Investment is depreciated over 10 years straight-line and income is taxed at a rate of 50%. UseTable 10.1.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

		Year 0	Years 1-10
1.	Investment	15.6
2.	Revenue		48.72
3.	Variable cost		36.00
4.	Fixed cost		3.12
5.	Depreciation		1.56
6.	Pretax profit		8.04
7.	Tax		4.02
8.	Net profit		4.02
	Operating cash flow		3
	Net cash flow	15	3

Variable cost per year

e.	Calculate the DOL. Consider fixed cost assuming the additional investment of 15.60 billion.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

DOL