For the following project, calculate the NPV break-even level of annual revenue, assuming that the operating cash flows will be stable for an 8 year horizon and that the discount rate is 12%. (10 points)

• The project requires an initial investment of $600,000.

• Expected annual sales are $770,000.

• Annual fixed costs (excluding depreciation and any other non cash expenses) will be $100,000.

• Straight-line depreciation of the initial investment over 8 years to a book value of 0.

• Variable costs (all of which are cash expenses) of 65% of revenues.

• Working capital will not be affected.

• Market values for salvage purposes in 8 years are estimated to be $40,000.

• 35% tax rate.

You are analyzing a capital budgeting project and, as shown by ???, some numbers are unreadable. You can read the following information:

Cash Flows at the end of:

Year 0 = -$25,000

Year 1 = +$8,000

Year 2 = +$ 6,000

Year 3 = +$ 2,600

Year 4 = $ ???

Year 5 = +$ 9,500

The Cost of Capital is 13%, the NPV = -$5,650.01 and the IRR = ???%. Your superior, ignoring the important fact that we should reject the project, is demanding to know the Cash Flow in Year 4.

Calculate the cash flow in Year 4. (5 points)

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