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Home / Questions / BREAKEVEN SENSITlVITY ANALYSIS The Cayton Manufacturing Company is consider­ing an invest...

BREAKEVEN SENSITlVITY ANALYSIS The Cayton Manufacturing Company is consider­ing an investment in a new automated inventory system for its warehouse that will provide cashsavings to the firm over the

BREAKEVEN SENSITlVITY ANALYSIS The Cayton Manufacturing Company is consider­ing an investment in a new automated inventory system for its warehouse that will provide cashsavings to the firm over the next five years.The firm’s CFO anticipates additional earn­ ingsbefore interest, taxes, depreciation, and amortization (EBITDA)19 from cost savings equal to$200,000 for the first year of operation of the center; over the next four years, the firmestimates that this amount will grow at a rate of 5% per year.The system will require an initialinvestment of $800,000 that will be depreciated over a five-year period using straight-linedepreciation of $160,000 per year and a zero estimated salvage value.L Calculate the project’s annual free cash flow (FCF) for each of the next five years, where thefirm’s tax rate is 35%.b. If the cost of capital for the project is 12%, what is the projected NPV for theinvestment?c. What is the minimum Year 1dollar savings (i.e., EBITDA) required to produce a breakeven NPV- 0?

May 21 2020 View more View Less

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