Assume that for Project 2, the company finally chose Option B. It expects to sell 8,500 wheelchairs for an average price of $750 per unit. The assembly in Option B has a residual value of $350 000 at the end of the project. The company will need to add $ 850 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:
Depreciation method: straight line
Variable cost per unit: $120
Cash fixed costs per year: $35,000 of annual cost for assembly operation + $20,000 other fixed cost
Corporate marginal tax: 30%
Upon the forecast of unexpected economic conditions that may be caused by the current breakout of corona virus, the company management requires your Team to prepare a risk analysis for the case where the unit price of this product decreases by 25%.
Required:
Perform an NPV break-even analysis to identify break-even sales of the project when the unit price decreases by 25%.
