# Additional 2 - the project is 12 percent. What is the...

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Additional assigned problems 1) A company has developed a new trap. It can go into production for an initial investment in equipment of \$6 million. The equipment will be depreciated straight-line over 5 years to a value of zero, but can be sold for \$500,000 after five years. The firm believes that working capital at each date must be maintained at a level of 10 percent of the next year’s forecast sales. The firm estimates production costs equal to \$1.50 per trap and believes that the trap can be sold for \$4 each. Sales forecasts are given in the following table. The project will come to an end in 5 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35 percent, and the required return on
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Unformatted text preview: the project is 12 percent. What is the project NPV? 1 2 3 4 5 Sales (millions of traps)- 0. 5 0. 6 1. 0 1. 0 0. 6 2) Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for \$100. The materials cost for a standard diamond is \$40. The fixed costs incurred each year for the factory upkeep and administrative expenses are \$200,000. The machine costs \$1 million and is depreciated straight-line over 10 years to a salvage value of zero. a. What is the accounting break-even level of sales in terms of the number of diamonds sold? b. What is the economic break-even level of sales assuming a tax rate of 35 percent, a 10 year project life, and a discount of 12 percent?...
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## This note was uploaded on 02/09/2010 for the course FINA 3001 taught by Professor Molly during the Spring '10 term at University of Minnesota Duluth.

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