Assume that for Project 2, the company finally chose Option

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%.

 

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