Question: Project A involves a new type of graphite composite in-line skate wheel. We think we can sell 6,000 units per year at a price of

Project A involves a new type of graphite composite in-line skate wheel. We think we can sell 6,000 units per year at a price of $1,000 each. Variable costs will run about $400 per unit, and the product should have a three-year life.

Fixed costs for the project will run $450,000 per year. Further, we will need to invest a total of $600,000 in manufacturing equipment. This equipment will be depreciated straight-line over three year. The cost of capital is 28 percent. Tax rate is 34 percent.

5. Calculate the NPV. Should we undertake the project? (6)

6. Calculate the financial break-even quantity? (consider the tax effect)(6)

7. What is the degree of operating leverage at the financial break-even level of output? (5)

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