Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems
Revenues 4.3
- Manufacturing Expenses -0.5
- Marketing Expenses -0.25
- Depreciation -0.5
= EBIT 3.05
- Taxes (40%) -1.22
= Unlevered net income 1.83
+ Depreciation +0.5
- Additions to Net Working Capital -0.4
- Capital Expenditures -6
= Free Cash Flow 1.93
It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the break-even point for manufacturing expenses, if all other estimates are correct and the cost of capital is 9%?
A) $1.66 million
B) $1.83 million
C) $1.99 million
D) $2.32 million
Answer: A
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