Question 1

If the company has a discount rate of 17%,should management decide to invest?

Accepted Answer

The investment should be made if the NPV is positive, and $21.6 million is the highest positive NPV among the options.

Question 2

The Mini-Max Company has the following cost information on its new prospective project.Calculate the accounting break-even point. Initial investment:
$700
Fixed costs:
$200 per year
Variable costs:
$3 per unit
Depreciation:
$140 per year
Price:
$8 per unit
Discount rate:
12%
Project life:
5 years
Tax rate:
34%

Accepted Answer

The accounting break-even point can be calculated using the following formula:

Accounting Break-Even Point = Fixed Costs + Depreciation / (Price - Variable Costs)

Substituting in the given values:

Accounting Break-Even Point = $200 + $140 / ($8 - $3) = 68

Therefore, the accounting break-even point is 68 units per year. Since option B is the only choice that matches this result, it is the best choice.

Question 3

You are considering a project which has been assigned a discount rate of 8 percent.If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years.If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.What is the value of the option to wait?

Accepted Answer

The value of the option to wait is the difference between the NPV of the project if you wait one year to start and the NPV of the project if you start today.The NPV of the project if you wait one year to start is:```NPV = -520 + 385/(1.08) + 385/(1.08)^2 + 385/(1.08)^3= $17.08```The NPV of the project if you start today is:```NPV = -480 + 350/(1.08) + 350/(1.08)^2 + 350/(1.08)^3= $0.23```Therefore, the value of the option to wait is:```$17.08 - $0.23 = $15.23```

Question 4

You are considering a new project.The project has projected depreciation of $720,fixed costs of $6,000,and total sales of $12,760.The variable cost per unit is $6.04.What is the accounting break-even level of production?

Accepted Answer

The answer of You are considering a new project.The project...

Question 5

If the company has a discount rate of 17%,what is the value closest to time 1 net present value?

Accepted Answer

The answer of If the company has a discount rate...

Question 6

Ralph and Emma's is considering a project with total sales of $17,500,total variable costs of $9,800,total fixed costs of $3,500,and estimated production of 400 units.The depreciation expense is $2,400 a year.What is the contribution margin per unit?

Accepted Answer

The answer of Ralph and Emma's is considering a project...

Question 7

At stage 2 of the decision tree it shows that if a project is successful,the payoff will be $53,000 with a 2/3 chance of occurrence.There is also the 1/3 chance of a $-24,000 payoff.The cost of getting to stage 2 (1 year out)is $44,000.The cost of capital is 15%.What is the NPV of the project at stage 1?

Accepted Answer

To calculate the NPV at stage 1, we need to discount the expected cash flows from stage 2 back to stage 1:

Expected cash flow at stage 2 = (2/3)($53,000) + (1/3)($-24,000) = $34,333

PV of expected cash flow at stage 2 = $34,333 / (1 + 0.15) = $29,836.52

NPV at stage 1 = -$44,000 + $29,836.52 = -$14,163.48

Therefore, the answer is B because the NPV at stage 1 is negative, indicating that the project should not be pursued.

Question 8

Given the following information,calculate the present value break-even point. Initial investment:
$2,000
Fixed costs:
$2,000 per year
Variable costs:
$6 per unit
Depreciation:
$250 per year
Price:
$20 per unit
Discount rate:
10%
Project life:
4 years
Tax rate:
34%

Accepted Answer

The answer of Given the following information,calculate the present value...

Question 9

A project has an accounting break-even point of 2,000 units.The fixed costs are $4,200 and the depreciation expense is $400.The projected variable cost per unit is $23.10.What is the projected sales price?

Accepted Answer

The answer of A project has an accounting break-even point...

Question 10

Kurt Neal and Son is considering a project with a discounted payback just equal to the project's life.The projections include a sales price of $12,variable cost per unit of $8.50,and fixed costs of $5,500.The operating cash flow is $7,200.What is the break-even quantity?

Accepted Answer

The break-even quantity is calculated by dividing the fixed costs by the contribution margin per unit (sales price - variable cost per unit). Here, the contribution margin is $12 - $8.50 = $3.50. The break-even quantity is $5,500 / $3.50 = 1,571.43 units. However, the operating cash flow of $7,200 suggests additional units are needed to cover this, leading to a total of 3,629 units.

Question 11

The Mini-Max Company has the following cost information on its new prospective project.Calculate the present value break-even point. Initial investment:
$700
Fixed costs are $200 per year
Variable costs:
$3 per unit
Depreciation:
$140 per year
Price:
$8 per unit
Discount rate:
12%
Project life:
3 years
Tax rate:
34%

Accepted Answer

The answer of The Mini-Max Company has the following cost...

Question 12

Wilson's Antiques is considering a project that has an initial cost today of $10,000.The project has a two-year life with cash inflows of $6,500 a year.Should Wilson's decide to wait one year to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $7,500 a year.What is the value of the option to wait if the applicable discount rate is 10 percent?

Accepted Answer

The answer of Wilson's Antiques is considering a project that...

Question 13

A proposed project has fixed costs of $3,700,depreciation expense of $1,600,and a sales quantity of 1,400 units.What is the contribution margin if the projected level of sales is the accounting break-even point?

Accepted Answer

The answer of A proposed project has fixed costs of...

Question 14

Your firm is considering a project with a five-year life and an initial cost of $120,000.The discount rate for the project is 12 percent.The firm expects to sell 2,100 units a year.The cash flow per unit is $20.The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000.You are interested in knowing how the project will perform if the sales forecast for years four and five of the project are revised such that there is a 50% chance that the sales will be either 1,400 or 2,500 units a year.What is the net present value of this project given your sales forecasts?

Accepted Answer

The answer of Your firm is considering a project with...

Question 15

Your firm is considering a project with a five-year life and an initial cost of $120,000.The discount rate for the project is 12 percent.The firm expects to sell 2,100 units a year.The cash flow per unit is $20.The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $45,000.At what level of sales should the firm be willing to abandon this project?

Accepted Answer

The answer of Your firm is considering a project with...

Question 16

Thompson & Son has been busy analyzing a new product.Management has determined that an operating cash flow of $16,700 will result in a zero net present value,which is a company requirement for project acceptance.The fixed costs are $12,378 and the contribution margin is $6.20.Management feels that they can realistically capture 10 percent of the 50,000 unit market for this product.Should the company develop the new product? Why or why not?

Accepted Answer

With a contribution margin of $6.20, the company will need to sell approximately 2,000 units to cover fixed costs ($12,378/ $6.20). Selling 5,000 units (10% of the market) will generate a total contribution margin of $31,000 (5,000 units x $6.20 per unit). Subtracting the fixed costs of $12,378 leaves an operating cash flow of $18,622, which is greater than the required $16,700 for a zero net present value. Therefore, the company should develop the new product as it will generate a positive net present value.

Question 17

The accounting break-even production quantity for a project is 7,425 units.The fixed costs are $51,600 and the contribution margin is $9.What is the projected depreciation expense?

Accepted Answer

The answer of The accounting break-even production quantity for a...

Question 18

A project has a contribution margin of $5,projected fixed costs of $13,000,projected variable cost per unit of $12,and a projected present value break-even point of 5,500 units.What is the operating cash flow at this level of output?

Accepted Answer

The answer of A project has a contribution margin of...

Question 19

From the information below,calculate the accounting break-even point. Initial investment:
$2,000
Fixed costs are $2,000 per year
Variable costs:
$6 per unit
Depreciation:
$250 per year
Price:
$20 per unit
Discount rate:
10%
Project life:
4 years
Tax rate:
34%

Accepted Answer

First, let's calculate the annual cash flows for each year:

Year 0:
Initial Investment: -$2,000

Years 1-4:
Revenue: $20 x Q
Variable Costs: $6 x Q
Fixed Costs: -$2,000
Depreciation: -$250
Taxable Profit: (Revenue - Variable Costs - Fixed Costs - Depreciation)
Taxes (34%): -Taxable Profit x 34%
Net Profit: Taxable Profit - Taxes

Year 4:
Terminal Value: Net Profit + Depreciation + Initial Investment

Next, we'll calculate the accounting break-even point. This is the quantity of units we need to sell in order to cover our fixed costs and depreciation:

Accounting Break-Even Quantity = (Fixed Costs + Depreciation) / (Price - Variable Cost per unit)
Accounting Break-Even Quantity = ($2,000 + $250) / ($20 - $6)
Accounting Break-Even Quantity = 161

Therefore, we need to sell 161 units per year to break even in accounting terms. Option D is the closest answer.

Question 20

Margerit is reviewing a project with projected sales of 1,500 units a year,a cash flow of $40 a unit and a three-year project life.The initial cost of the project is $95,000.The relevant discount rate is 15 percent.Margerit has the option to abandon the project after one year at which time she feels she could sell the project for $70,000.At what level of sales should she be willing to abandon the project?

Accepted Answer

To determine the level of sales at which Margerit should be willing to abandon the project, we need to compare the present value of the expected cash flows for the next two years with and without the abandonment option.

Without abandonment option:
PV of expected cash flows for year one and two = 1500*40*(1-(1+15%)^-2)/15% = $83,878.85
Initial cost = $95,000
Net present value (NPV) = $83,878.85 - $95,000 = -$11,121.15

With abandonment option:
PV of expected cash flow for year one = 1500*40*(1-(1+15%)^-1)/15% = $51,724.14
Expected sale price after year one = $70,000
PV of expected cash flow if project is abandoned after year one = $51,724.14 + $70,000/(1+15%) = $112,029.68
Initial cost = $95,000
NPV = $112,029.68 - $95,000 = $17,029.68

Therefore, Margerit should be willing to abandon the project if the level of sales is less than the breakeven point where NPV = $0:
$11,121.15/(1+15%) + $17,029.68/(1+15%)^2 + X*40*(1-(1+15%)^-2)/15% = $70,000/(1+15%)
Solving for X, we get X = 1,077 units.

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