Forecasts for project ST are shown above. Using a discount rate of 10%, the project has a positive NPV of $6,074.69. Estimate within $100 the level of sales revenue that will result in an NPV of $0.00. No other variables will change
Year 0 Year 0 Year 1 Year 2
Revenue $15,000 $15,000
Variable Cost ($5,000) ($5,000)
Depreciation ($200) ($200)
Fixed Cost ($350) ($350)
Operating Income $9,450 $9,450
Taxes at 30% ($2,835) ($2,835)
NOPAT $6,615 $6,615
Capital Investment ($5,753)
Free Cash Flow $6,815 $6,815
NPV $6,074.69
Answer: By trial and error, sales revenue of $10,000 will result in free cash flow $3,315 for each year and a net present value close to $0.00. Using a financial calculator, students could also solve for the 2 year annuity that results in NPV = CAPEX and then work their way back up through the pro forma cash flow forecasts.
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