The project in problem 3 will last for 10 years. The discount rate is 12%.
A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million. The firm’s tax rate is 35%. What are the effects of the following changes on after-tax profits and cash flows?
a. Sales increase from $10 million to $11 million.
b. Variable costs increase to 60% of sales.
a. What is the effect on project NPV of each of the changes considered in the problem?
b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative?
c. How much can fixed costs increase before accounting profits turn negative?