FINANCE-The expected annual free cash flow for the GPS tracker investment

Question 1

The expected annual free cash flow for the GPS tracker investment from problem 3-1 is computed as follows

Revenue 1,250,000

Variable cost 750,000

Fixed expenses 250,000

Gross profit 250,000

Depreciation 100,000

Net operating income 150,000

Income tax expenses 51,000

NOPAT 99,000

Plus depreciation 100,000

Less CAPEX -

Less working capital investments -

Free cash flow 199,000

Required

a. Construct a spreadsheet model to compute free cash flow that relies on the following assumptions or estimate.

Base Case estimate values

Initial cost of equipment 1000,000.00

Project and equipment life 10years

Salvage value of equipment $0

Working capital requirement $0

Depreciation method straight-line

Depreciation expenses 1000,000.00

Discount Rate 10.00%

Tax rate 34.00%

Unit sales 10,000

Price per unit 125.00

Variable cost per unit $75.00

Fixed costs $250,000.00

b. What level of annual unit sales does it take for the investment to achieve a zero NPV? Use your spreadsheet model to answer this question.(Hint use the Goal seek function in excel)

c. If unit sales were 15% higher than the base case, what unit price would it take for the investment to achieve a zero NPV?