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Question 1  
Nakami Limited is evaluating whether or not to produce a new line of portable wireless speakers. If the firm decides to embark on this project, it needs to invest $3.2 million on production equipment.   
The forecasted selling price is $100 per unit and this will increase in line with general inflation of 3% per year. Forecasted sales and production have been estimated as follows:  
Year 1 2 3 4 Sales and production (units) 27,000 30,000 35,000 25,000  
Due to rapid advancement in technology of audio products, the operations will cease at the end of four years.   
Variable costs are about 60% of selling price. Incremental overheads, which includes primarily rental, is estimated to be $200,000 per year. Net working capital amounting 15% of sales is required at the beginning of each year. This will be fully recovered when the operations cease and scrap value of equipment is about 5% of its cost.  
Depreciation is computed on a straight-line basis over the four-years. The rate of corporation tax is 17%. Nakami has traditionally used a discount rate of 11% per year for investment appraisal.   
(a) Calculate the accounting break-even and cash break-even for each of the four (4) years. (10 marks)  
(b) Calculate the NPV break-even for this investment opportunity.  Hint: The number of units sold must be same in each of the four years.
(8 marks)  
(c) Calculate the degree of operating leverage (DOL) for the first year of operations. Using the DOL you have computed, determine the net operating income (or EBIT) if sales increase by 10%. (6 marks)
FIN309 Assignment 2
SIM UNIVERSITY Assignment 2 – Page 3 of 5
(d) Since it is a new product, Nakami is not sure about the forecast. On further research, the marketing department has made the following demands in units forecasts based on the probability.   
Probability Year 1 Year 2 Year 3 Year 4 0.5 22,000 25,000 30,000 20,000 0.5 32,000 35,000 40,000 30,000 Expected      27,000 30,000 35,000 25,000  
The probabilities are for the series of demand in units.  
Given this refinement in forecast, discuss the strategies Nakami can follow in relation to this project. Assume that the company will install a capacity of 27,000 units based on the expected demand in units at the current time. 

ACCT5021 Accounting

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