Suppose a firm is considering the following project where all of the dollar figures are in thousands of dollars. In year 0, the project requires $24,490 investment in plant and equipment, is depreciated using the straight-line method over seven years and there is a salvage value of $5,800 in year 7. The project is forecast to generate sales of 4,800 units in year 1 and grow at a sales growth rate of 72.0% in year 2. The sales growth rate is forecast to decline by 12.0% in year 3, to decline by 15.0% in year 4, to decline by 18.0% in year 5, to decline by 23.0% in year 6, to decline by 29.0% in year 7. Unit sales will drop to zero in year 8.
The inflation rate is forecast to be 2.7% in year 1 and rising to 3.5% in year 7. The real cost of capital is forecast to be 10.2% in year 1, rising to 11.9% in year 7. The tax rate is forecast to be a constant 38.0%. Sales revenue per unit is forecast to be $12.20 in year 1 and then grow with inflation. Variable cost per unit is forecast to be $7.30 in year 1 and then grow with inflation. Cash fixed costs are forecast to be $6,740 in year 1 and then grow with inflation. What is the project NPV? What is the NPV Break-Even Point in Year 1 Unit Sales, where NPV equals zero? What is the NPV Break-Even Point in the Year 2 Sales Growth Rate, where NPV equals zero? What is the NPV Break-Even Contour in the two-dimensional space of Year 1 Unit Sales and Year 2 Sales Growth Rate?
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