Harper Industries is examining a new project to manufacture cell phones. The company has examined several alternatives for the manufacturing process. With Process I, the company would manufacture the cell phone entirely in-house. This would require the highest initial cost and fixed costs. Process II would involve subcontracting the manufacture of the electronics. While this would reduce the initial cost and fixed costs, it would result in higher variable costs. Finally, Process III would subcontract all production, with Harper Industries only completing the final assembly and testing. Below you are given the information for each of the options available to the company. Process I Process II Process III
Initial Cost 75,000,000 55,000,000 36,000,000
Life (years) 7
Units 450,000
Price Per Unit 345
VC Per Unit 85 137 182
Fixed Costs 81,000,000 63,000,000 48,000,000
Required Return 13%
Tax Rate 38%
A: Calculate the NPV for each of the 3 manufacturing processes available to the company.
Pro Forma Income Statement
Process I Process II Process III
Sales
Variable Costs
Fixed Costs
Depreciation
EBIT
Taxes (38%)
Net Income
OCF
NPV
B: What are the accounting break-even, cash break-even, and financial break-even points for each manufacturing process?
Process I Process II Process III
Accounting Break-Even
Cash Break-Even
Financial Break-Even
C: What is the DOL for each manufacturing process? Graph the DOL for each manufacturing process on the same graph for different unit sales.
Process I
Unit Sales OCF DOL
350,000
370,000
390,000
410,000
430,000
450,000
470,000
490,000
510,000
530,000
550,000
Process II
Unit Sales OCF DOL
350,000
370,000
390,000
410,000
430,000
450,000
470,000
490,000
510,000
530,000
550,000
Process III
Unit Sales OCF DOL
350,000
370,000
390,000
410,000
430,000
450,000
470,000
490,000
510,000
530,000
550,000