Chapter 10 Project Analysis 273
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Market size 1.1 million
Market share 0.1
Unit price ¥400,000
Unit variable cost ¥360,000
Fixed cost ¥2 billion- Scenario analysis What is the NPV of the electric scooter project under the following
scena r io? - Sensitivity analysis Otobai’s staff (see Section 10-2) has come up with the following
revised estimates for the electric scooter project:
Pessimistic Expected OptimisticMarket size 0.8 million 1.0 million 1.2 million
Market share 0.04 0.1 0.16
Unit price ¥300,000 ¥375,000 ¥400,000
Unit variable cost ¥350,000 ¥300,000 ¥275,000
Fixed cost ¥5 billion ¥3 billion ¥1 billionConduct a sensitivity analysis using the spreadsheets (see the Beyond the Page feature). What
are the principal uncertainties in the project?- Break-even analysis and operating leverage Otobai is considering still another produc-
tion method for its electric scooter (see Section 10-2). It would require an additional invest-
ment of ¥15 billion but would reduce variable costs by ¥40,000 per unit. Other assumptions
follow Table 10.1.
a. What is the NPV of this alternative scheme?
b. Draw break-even charts for this alternative scheme along the lines of Figure 10.2.
c. Explain how you would interpret the break-even figure.
d. Now suppose Otobai’s management would like to know the figure for variable cost per
unit at which the electric scooter project in Table 10.1 would break even. Calculate the
level of costs at which the project would earn zero profit and at which it would have zero
NPV. Assume that the initial investment is ¥15 billion.
e. Calculate DOL based on the alternative scheme.
- Break-even analysis Break-even calculations are most often concerned with the effect of
a shortfall in sales, but they could equally well focus on any other component of cash flow.
Dog Days is considering a proposal to produce and market a caviar-flavored dog food. It will
involve an initial investment of $90,000 that can be depreciated for tax straight-line over
10 years. In each of years 1–10, the project is forecast to produce sales of $100,000, and to
incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%,
and the cost of capital is 10%.
a. Calculate the NPV and accounting break-even levels of fixed costs.
b. Suppose that you are worried that the corporate tax rate will be increased immediately
after you commit to the project. Calculate the break-even rate of tax.
c. How would a rise in the tax rate affect the accounting break-even point?
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Scooter project
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