Question 1

A project has earnings before interest and taxes of $7,318,fixed costs of $13,480,a selling price of $14 a unit,and a sales quantity of 7,500 units.Depreciation is $2,200.What is the variable cost per unit?

Accepted Answer

$7,318 = [7,500 × ($14 - Variable costs)] - $13,480 - $2,200 Variable costs = $10.93

Question 2

Ernestine is analyzing a 4-year project with an initial cost of $87,000,a required rate of return of 14 percent,and a chance of success of 4 percent.If the project succeeds,the annual cash flow will be $1,789,000.If the project fails,the annual cash flow will be -$131,000.The project can be shut down after the first 2 years but all monies invested will be lost.None of the initial cost can be recouped after 4 years.What is the net present value of this project at Time 0?

Accepted Answer

NPV₀ = -$87,000 + 0.04{$1,789,000[(1 - 1 / 1.14⁴)/ 0.14]} + 0.96{-$131,000[(1 - 1 / 1.14²)/ 0.14]} NPV = -$85,578.77

Question 3

New Foods is analyzing a proposed project with expected sales of 8,700 units,±4 percent.The expected variable cost per unit is $26 and the expected fixed costs are $49,000.Cost estimates are considered accurate within a range of ±1 percent.The depreciation expense is $18,300.The sale price is estimated at $52 a unit,±3 percent.If the company conducts a sensitivity analysis using a variable cost of $28,what will be the total variable cost estimate?

Accepted Answer

Total variable cost $28 = $28 × 8,700 = $243,600

Question 4

The project defined by the following decision tree has a required discount rate of 14 percent.

What is the Time 1 net present value of a successful investment?

Accepted Answer

NPV₁ = -$100,000,000 + $66,000,000[(1 - 1 / 1.14⁴)/ 0.14] = $92,305,012

Question 5

A project has estimated sales of 11,500 units,±2 percent.The expected variable cost per unit is $13,and the expected fixed costs are $29,000.The fixed and variable cost estimates are considered accurate within a range of ±3 percent.The sales price is estimated at $29 a unit,±1 percent.What is the contribution margin for a sensitivity analysis using a fixed cost of $30,000?

Accepted Answer

Contribution margin = $29 - $13 = $16

Question 6

At a production level of 5,150 units,a project has total cash costs of $130,789.The variable cost per unit is $11.07,and the depreciation is $8,600.What is the amount of the total fixed costs?

Accepted Answer

$130,789 = (5,150 × $11.07)+ Fixed costs Fixed costs = $73,778.50

Question 7

The Garden Mart is analyzing a proposed 3-year project.Expected sales are 16,000 units,±6 percent.The expected variable cost per unit is $4,and the expected fixed costs are $16,000.The fixed and variable cost estimates have a range of ±1 percent.The sales price is estimated at $15 a unit,±3 percent.The project requires an initial investment of $41,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $12,000 at the end of the project.The project requires $5,600 in net working capital.The discount rate is 16 percent,and the tax rate is 35 percent.What is the operating cash flow under the optimistic case scenario?

Accepted Answer

OCF _Optimistic = {(16,000 × 1.06)× [($15 × 1.03)- ($4 × 0.99)] - ($16,000 × 0.99)}{1 - 0.35)+ [($41,000 / 3)× 0.35] = $121,153.09

Question 8

Nu-Tek is analyzing a proposed project with expected sales of 5,800 units,±6 percent.The expected variable cost per unit is $11 and the expected fixed costs are $15,600.Cost estimates are considered accurate within a range of ±4 percent.The depreciation expense is $5,700.The sale price is estimated at $21 a unit,±1 percent.What is the sales revenue under the pessimistic case scenario?

Accepted Answer

Sales revenue _Pessimistic = 5,800 × 0.94 × $21 × 0.99 = $113,347.08

Question 9

William's Co.is considering spending $29,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $64,000 at Time 1 to start production.If the product is introduced and it is successful,it will produce after-tax cash flows of $48,000 a year for Years 2 through 4.If it is unsuccessful,there will be no cash flow in Year 1,after which the project will be terminated.There are no recovery costs at the end of Year 4.The probability of a successful test and investment is 58 percent.What is the net present value at Time 0 given a discount rate of 16 percent?

Accepted Answer

NPV₁ = -$64,000 + $48,000{[(1 - 1 / 1.16³)] / 0.16} = $43,802.70 NPV₀ = -$29,000 + 0.58($43,802.70 / 1.16)+ (0.42 × $0)= -$7,098.65

Question 10

At a production level of 7,500 units,a project has earnings before interest and taxes of $48,310.Depreciation is $9,700,and fixed costs are $12,200.What is the variable cost per unit if the sales price per unit is $29.50?

Accepted Answer

$48,310 = 7,500($29.50 - VC)- $12,200 - $9,700 VC = $20.14

Question 11

Green Gardens is analyzing a proposed 5-year project that requires an investment of $77,000 in fixed assets and $17,400 in net working capital.The company uses straight-line depreciation over a project's life.Sales are estimated at 24,000 units ±3 percent.The expected variable cost per unit is $17,and the expected fixed costs are $39,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $36 a unit,±1 percent.The discount rate is 16 percent,and the tax rate is 35 percent.What is the net income under the pessimistic case scenario?

Accepted Answer

Net income_Pessimistic = ({(24,000 × 0.97)× [($36 × 0.99)- ($17 × 1.02)]} - ($39,000 × 1.02)- ($77,000 / 5))× (1 - 0.35)= $241,048.60

Question 12

A project requires an initial investment of $69,000 for equipment that will be depreciated using the straight-line method to zero over the project's 4-year life.The equipment can be sold for $15,000 at the end of the project.The project requires $8,700 in net working capital.The company expects to sell 31,000 units,±5 percent.The expected variable cost per unit is $12,and the expected fixed costs are $46,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The discount rate is 14 percent,and the tax rate is 34 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $45,000?

Accepted Answer

OCF _FC = $32,000 = {[31,000 × ($19 - 12)] - $45,000}(1 - 0.34)+ [($69,000 / 4)× 0.34] = $119,385

Question 13

A 6-year project has expected sales of 2,000 units,±4 percent.The expected variable cost per unit is $8,and the expected fixed costs are $9,800.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $22 a unit,±3 percent.The project requires an initial investment of $42,000 for equipment that will be depreciated straight-line to zero over the project's life.The equipment has a pretax salvage value of $5,000 at the end of the project.The project requires $2,600 in net working capital during its life.The discount rate is 9 percent,and tax rate is 30 percent.What is the net present value for the optimistic scenario?

Accepted Answer

OCF _Optimistic = {(2,000 × 1.04)× [($22 × 1.03)- ($8 × 0.98)] - ($9,800 × 0.98)}{1 - 0.30)+ [($42,000 / 6)× 0.30] = $16,955.12 NPV _Optimistic = -$42,000 - $2,600 + $16,955.12[(1 - 1 / 0.09⁶)/ 0.09] + {[$5,000 × (1 - 0.30)] + $2,600} / 1.09⁶ = $35,096.52

Question 14

Appalachian Crafts is analyzing a project with expected sales of 18,900 units,±2 percent.The expected variable cost per unit is $23 and the expected fixed costs are $52,000.Cost estimates are considered accurate within a range of ±1 percent.The depreciation expense is $18,400.The sale price is estimated at $54 a unit,±2 percent.What is the total dollar difference between the revenue using the optimistic sale price versus the expected sale price?

Accepted Answer

Revenue difference = 18,900[(1.02 × $54)- $54] = $20,412

Question 15

DK Markets expects a new project to produce sales of 9,600 units,±8 percent.The expected variable cost per unit is $17 and the expected fixed costs are $47,000.Cost estimates are considered accurate within a range of ±3 percent.The depreciation expense is $24,600.The sale price is estimated at $39 a unit,±2 percent.What is the amount of the fixed cost per unit under the pessimistic case scenario?

Accepted Answer

Fixed cost per unit _Pessimistic = ($47,000 × 1.03)/ (9,600 × 0.92)= $5.48

Question 16

The Meat Mart has computed its fixed costs to be $.38 per pound given an average daily sales level of 500 pounds.It charges $5.59 a pound for top-grade ground beef.The variable cost per pound is $2.64.The tax rate is 34 percent.The accounting profit breakeven point is 211.5 pounds per day.What is the amount of the depreciation expense?

Accepted Answer

Accounting profit breakeven point = 211.5 = {[($0.38 × 500)+ D](1 - 0.34)} / [($5.59 - 2.64)(1 - 0.34)] D = $433.93

Question 17

Mercier's is analyzing a proposed 4-year project with expected sales of 26,500 units,±3 percent.The expected variable cost per unit is $10,and the expected fixed costs are $42,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The project requires an initial investment of $74,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $20,000 at the end of the project.The project requires $11,200 in net working capital.The discount rate is 14 percent,and the tax rate is 35 percent.What is the earnings before interest and taxes estimate under the expected case scenario?

Accepted Answer

EBIT _Expected = [26,500 × ($19 - $10)] - $42,000 - ($74,000 / 4)= $178,000

Question 18

Roy is analyzing a 5-year project with an initial cost of $210,000,a required return of 16 percent,and a probability of success of 62 percent.If the project fails,it will generate an annual after-tax cash flow of -$48,500.If the project succeeds,the annual after-tax cash flow will be $79,000.He has further determined that if the project fails,he will shut it down after the first year and lose all of his original investment.If,however,the project is a success,he can expand it with no additional investment and increase the after-tax cash flow to $154,000 a year for Years 2-5.At the end of Year 5,the project would be terminated and have no salvage value.What is the net present value of this project at Time 0?

Accepted Answer

The net present value at Year 1 for the successful cash flows for Years 2-5 is: NPV₁ for Years 2-5 = $154,000[(1 - 1 / 1.16⁴)/ 0.16] = $430,919.82 NPV₀ = -$210,000 + 0.62[($79,000 + $430,919.82)/ 1.16] + 0.38(-$48,500 / 1.16)= $46,655.42

Question 19

The estimates for a project include a sales quantity of 22,300 units,±4 percent,variable costs per unit of $8,and fixed costs of $127,800.Cost estimates are considered accurate within a range of ±3 percent.The depreciation expense is $48,000.The sale price is estimated at $19 a unit,±6 percent.The company is conducting a sensitivity analysis on the sale price using a sale price estimate of $18.Using this value,what will be the earnings before interest and taxes?

Accepted Answer

EBIT_SP _{= $18} = [($18 - $8)× 22,300] - $127,800 - 48,000 = $47,200

Question 20

The project defined by the following decision tree has a required discount rate of 17 percent.

What is the Time 0 net present value of a successful test and investment?

Accepted Answer

NPV₁ = -$100,000,000 + $66,000,000[(1 - 1 / 1.17⁴)/ 0.17] = $81,053,511 NPV₀ = -$20,000,000 + 0.6 × ($81,053,511 / 1.17)+ (0.4 × $0)= $21,565,903

Quiz 9: Risk Analysis, Real Options, and Capital Budgeting

A project has earnings before interest and taxes of $7,318,fixed costs of $13,480,a selling price of $14 a unit,and a sales quantity of 7,500 units.Depreciation is $2,200.What is the variable cost per unit?

The project defined by the following decision tree has a required discount rate of 14 percent. What is the Time 1 net present value of a successful investment?

At a production level of 5,150 units,a project has total cash costs of $130,789.The variable cost per unit is $11.07,and the depreciation is $8,600.What is the amount of the total fixed costs?

At a production level of 7,500 units,a project has earnings before interest and taxes of $48,310.Depreciation is $9,700,and fixed costs are $12,200.What is the variable cost per unit if the sales price per unit is $29.50?

The project defined by the following decision tree has a required discount rate of 17 percent. What is the Time 0 net present value of a successful test and investment?