Finance Chapter 9

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eddieglines
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204736
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Finance Chapter 9
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2013-03-06 20:28:21
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Finance
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  1. Torkelson Inc. is evaluating a project that costs $940,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 190,000 units per year. Price per unit is $41, variable cost per unit is $27, and fixed costs are $880,000 per year. The tax rate is 34 percent, and we require a 17 percent return on this project.
    Calculate the accounting break-even point.
    71,250
  2. Torkelson Inc. is evaluating a project that costs $940,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 190,000 units per year. Price per unit is $41, variable cost per unit is $27, and fixed costs are $880,000 per year. The tax rate is 34 percent, and we require a 17 percent return on this project.
    (a) Calculate the base-case cash flow and NPV.
    (b) What is the sensitivity of NPV to changes in the sales figure?
    (c) What does your answer tell you about a 500-unit decrease in projected sales?
    (d) What is the sensitivity of OCF to changes inthe variable cost figure?
    (e) What does your answer tell you about a $1decrease in estimated variable costs? Ifvariable costs decrease by $1 then, OCF wouldincrease by:
    • a) 1,214,750
    • b) 38.87
    • c) -$19,437
    • d) -125,400
    • e) 125,400
  3. Dollenz Inc. just purchased a $220,000 machine to produce ice picks. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each pick sells for $23. The variable cost per pick is $6, and the firm incurs fixed costs of $310,000 each year. The corporate tax rate for the company is 29 percent. The appropriate discount rate is 12 percent. What is the financial break-even point for the project?
    OCF: N 5, I/Y 12, PV -220,000, FV 0, CMP PMT

    OCF = [(P-VC)Q-FC] (1-T) + DT, Solve for Q

    Q = 22,234 units
  4. Jones, Inc. has a new baby formula ready to market. If the firm goes directly to the market with the product, there is only a 56 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $3 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 71 percent. If successful, the baby formula will bringa present value profit (at time of initial selling) of $34 million. If unsuccessful, the present value payoff is only $3 million. The appropriate discount rate is 13 percent. Should the firm conduct customer segment research or go directly to market?
    • 1. Decision tree with probabilities
    • 2. cash flows when they happen
    • 3. discount cash flows to time zero
    • 4. multiply probabilities times cash flows and sum them up including initial investments.
    • Research = 19,132,743
    • No Research = 20,360,000
  5. Kirschner Corp. is considering investing in a company that cultivates crabs for sale to local restaurants. Use the following information:Sales price per crab $3 Variable costs per crab $0.74 Fixed costs per year $390,000 Depreciation per year $20,000 Tax rate 38%The discount rate for the company is 19 percent, the initial investment in equipment is $140,000, and the project's economic life is seven years. Assume the equipment is depreciated on a straight-line basis over the project's life.
    A. What is the accounting break-even level for the project?
    B. What is the financial break-even level for the project?
    • A. 181,416
    • B. 194,105
  6. Boyce, Hart and Co. has purchased a brand new machine to produce its Clarksville line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $277,000. The sales price per pair of shoes is $60, while the variable cost is $9. $120,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 35 percent and the appropriate discount rate is 8 percent.What is the financial break-even point?
    3,816
  7. We are evaluating a project that costs $850,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight line to zero over the life of the project. Sales are projected at 200,000 units per year. Price per unit is $44, variable cost per unit is $26, and fixed costs are $870,000 per year. The tax rate is 35%, and we require a 16% return on this project. Calculate the accounting breakeven.
    54,236
  8. A firm just purchased a $160,000 machine to produce toy cars. The machine will be fully depreciated by the straight line method over its five year economic life. Each toy sells for $23. The variable cost per toy is $5, and the firm incurs fixed costs of $350,000 each year. The corporate tax rate for the company is 22%. The appropriate discount rate is 13%. What is the financial breakeven point for the project?
    22,183
  9. A firm has purchased a brand-new machine to produce its line of shirts. The machine has an economic life of five years. The depreciation schedule for the machine is straight line with no salvage value. The machine costs $349,000. The sales price per shirt is $80, while the variable cost is $12. Fixed costs of $130,000 per year are attributable to the machine. Assume that the corporate tax rate is 34% and the appropriate discount rate is 12%. What is the financial breakeven point?
    3,540
  10. What is risk? Is new product or cost-cutting greater risk in general?
    Greater risk with new product because cash flows probably harder to predict.
  11. What is the difference between sensitivity analysis and scenario analysis
    With sensitivity analysis one variable is examined over broad range of values. With scenario analysis all variables are examined for limited range of values.
  12. Order of break even points
    • 1. cash
    • 2. accounting
    • 3. financial

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