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-Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.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 10%?

Question

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-Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.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 10%?

Quizplus · Accepted Answer

The break-even point for manufacturing expenses is the level of expenses at which the project's NPV is zero. To calculate this, we can use the following formula:Break-even point = (Initial investment - Terminal value) / (PVAF of annuity factor - 1)where:Initial investment = -$1.0 millionTerminal value = $0.2 millionPVAF of annuity factor = 6.14457 (calculated using the formula PVAF = 1 / (r * (1 - (1 + r)^-n)))Plugging in these values, we get:Break-even point = (-$1.0 million - $0.2 million) / (6.14457 - 1) = -$0.78 millionTherefore, the break-even point for manufacturing expenses is $0.78 million.

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