Maddox Smith Staff asked 5 years ago

Projected Unit Sales

Question 1:    JB Ltd’s projected profit for 2015 is $550,000, based on a sales volume of 200,000 units.  JB Ltd sells USB flash drive for $15 each.  Variable costs consist of the $9 purchase price and a $1 shipping and handling cost.  JB’s annual fixed costs are $450,000.     REQUIRED:   a)    Calculate JB Ltd’s break-even point in unit sales and dollars.   b)    Calculate JB Ltd’s margin of safety in units.   c)    Calculate JB Ltd’s profit for 2015 if there is a 15% increase in projected unit sales.   d)    For 2015, management expects that the unit purchase price of the USB flash drive will increase by 10%.  Calculate the sales revenue JB Ltd must generate for 2015 to maintain the current year’s profit ($550,000) if the selling price and fixed cost remain unchanged.     Question 2 Capital Investment Decisions   Chima construction Ltd is deciding whether to purchase certain equipment in the coming year.  The capital budget has a cap of $6,800,000 for the year.  Stephen, project analyst at Chima construction Ltd, is preparing an analysis of the three projects under consideration by Rod, the company’s owner.     Project A Project B Project C Projected cash outflow       Net initial investment $5,000,000 $1,500,000 $4,000,000 Projected cash inflows       Year 1 $1,000,000 $400,000 $1,000,000 Year 2 $1,000,000 $1,000,000 $1,000,000 Year 3 $1,500,000 $1,000,000 $2,100,000 Year 4 $1,500,000 $500,000 $1,000,000 Year 5 $3,000,000 $300,000 $300,000 Required rate of return 12% 12% 12%   REQUIRED   a) Calculate the payback period for each of the three projects.  Ignore income taxes.  Using the payback method, which project should Chima construction Ltd choose?   b) Stephen thinks that projects should be selected based on their NPVs.  Assume all cash flows occur at the end of the year except for initial investment amounts.  Calculate the NPV for each project.  Provide NPV projects ranking.   c) Which projects would you consider should be funded?  Briefly explain the reasons for your decision.