What is the npv of the investment » Full Grade

Assignment ID: FG133120387

Pill Ltd. has just purchased a $5,500,000 machine to produce big-screen TVs. The machine can be used for 10 years and is depreciated on a straight-line basis for tax purposes. For simplicity, we assume that no NWC is required. The number of TVs that can be produced and sold per year is 2,400, and the sales price per TV 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. What is the NPV of the investment? Is the investment still acceptable if the company can only produce and sell 2,000 TVs per year and variable costs account for 70% of total revenue per year?
2. What must be the minimum number of TVs produced and sold per year for the company to receive any accounting profits? What must be the minimum number of TVs produced and sold per year for the company to receive any economic profits?
3. Explain the differences between the accounting break-even point and economic break-even point.
4. If the tax rate is higher than 35%, how your answers for part (b) will change and why?
5. What is the project’s degree of operating leverage?