At Macrohard, Inc. the cost of secret project X is $100,000. According to a confidential management report, the following can be expected in each of the five years of the machine’s life.

                                                Year 0                      Years 1-5        

Investment                            $100,000                                          

Sales                                                                          $350,000      

Variable costs@ 77% 269,500       

Fixed costs                                                                  30,000       

Depreciation                                                                20,000          

Pretax Profit                                                                  30,500          

Taxes @ 40%                                                               12,200          

After-tax Profits                                                             18,300          

Cash Flows                                                                 38,300          

Assume the cost of capital is 10%.

NPV = $45,187

What if the price of the machine turns out to be $120,000 instead of $100,000 (assume straight line depreciation)? What happens to net present value?

Instead, what if the economy booms and sales come in at $450,000 per year (variable costs remain at 77% of sales)? What happens to net present value?

Calculate the accounting break-even level of sales in dollars.

Calculate the break–even level of sales in units if the price per unit is $35:

Assume that a rival (Gill Bates, Inc.) is working on a similar project. If they can develop their product, you project that your sales estimate will be 10% lower than originally thought and that your variable costs will rise to 78.5% of sales due to higher promotional costs. Should you go ahead with the project?