Financial Economics Issues - Assignment Example

The financial breakeven point is calculated by (initial investment-(net working capital of 5th year/1.15^5))/ ((1-(1/1.15^7))/0.15). 15% is the discount rate. This will give the PMT. Now we need to calculate the breakeven year. We can see the break-even is earned between the 4th and the 5th year. Thus we need to calculate it as = discounted amount from the year 5th+((-net present value up to 4th year)/4). The breakeven year is 4.61. Now the breakeven quantity can be calculated as = undiscounted amount of 4th year/ 1250 (Samuelson, No date, p. 180). The financial breakeven point is calculated by using the 15% return.

From the above table, we can see that the financial breakeven quantity is 111.03 units and it indicates that the company needs to produce at least 111.03 units of output to reach the no profit and no loss situation. If we can sell 60 choppers in the first year and the sales volume is increased by 5% each year for the next 5 years then the net present value will be $152793 at a discount rate of 15 %.( see appendix table 8). If the company needs to invest the working capital which is equal to 10% of the next year’s sales revenue then the net present value of the project will be $95626 and the IRR of the project is 21.01%. It can be seen that the investment of working capital has reduced the net present value of the project.

(See appendix table 9). The exchange rate between the Canadian dollar and US dollar is that by 1 

Canadian Dollar (CAD) we can get 0.89792 USD and by giving 1 USD we can get 1.11404 CAD. 8it indicates the value of US$ is higher than CAD (XE, 2014).

According to xe.com, 1 ounce of Gold equals 1464.09 Canadian dollars. It means by paying 1464.09 Canadian Dollars, 1 ounce of Gold can be bought. On the other side, 1 ounce of Gold equals 1314.39 USD. It means by paying 1314.39 USD, 1 ounce of Gold can be bought. It can be seen that there is a difference in the exchange rate between CAD and USD because $1314.39 is needed to buy 1 ounce of Gold and 1464.09 CAD is needed to buy 1 ounce of Gold. Now to get the difference between the two currencies we need to convert the CAD into US dollars. It has been mentioned earlier that 1 CAD equals 0.89792 USD (XE, 2014).