Question 1

A project has earnings before interest and taxes of $6,355,fixed costs of $11,600,a selling price of $12 a unit,and a sales quantity of 10,500 units.Depreciation is $2,200.What is the variable cost per unit?

Accepted Answer

EBIT = $6,355 = [10,500 × ($12 - VC)] - $11,600 - 2,200VC = $10.08

Question 2

The Meat Mart has computed its fixed costs to be $.63 per pound given an average daily sales level of 500 pounds.It charges $3.79 a pound for top-grade ground beef.The variable cost per pound is $2.99.The tax rate is 35 percent.The accounting profit break-even point is 487.5 pounds.What is the amount of the depreciation expense?

Accepted Answer

Accounting profit break-even point = 487.5 = {[($.63 × 500)+ D](1 - .35)}/[($3.79 - 2.99)(1 - .35)]D = $75

Question 3

ELK,Inc.has compiled this information for a proposed project: Sales price = $89 ± 3 percent;Fixed costs = $21,800 ± 1 percent;Variable cost per unit = $42.90 ± 3 percent;Sales quantity = 1,500 units ± 5 percent;Tax rate = 34 percent;Initial investment in fixed assets = $36,500;Depreciation method = Straight-line to a zero book value over the project's life;Project life = 4 years;Salvage value of fixed assets = $0;Net working capital requirement = $4,800,which will be recouped at the end of the project;Discount rate = 12 percent.What is the project's net present value for the pessimistic scenario?

Accepted Answer

OCF_Pessimistic = {(1,500 × .95)× [($89 × .97)- ($42.90 × 1.03)] - ($21,800 × 1.01)} × (1 - .34)+ [($36,500/4)× .34] = $28,206.11NPV = -$36,500 - 4,800 + $28,206.11[(1 - 1/1.12⁴)/.12] + $4,800/1.12⁴ = $47,422.30

Question 4

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $18.Using this value,the earnings before interest and taxes will be:

Accepted Answer

EBIT_{SP = $18} = [($18 - 13)× 4,500] - $12,000 - 5,000 = $5,500

Question 5

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 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 = ($12,000 × 1.05)/(4,500 × .89)= $3.15

Question 6

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the net present value for the optimistic scenario?

Accepted Answer

OCF_Optimistic = {(12,000 × 1.04)× [($14 × 1.05)- ($7 × .94)] - ($36,000 × .94)}{(1 - .34)+ [($90,000/3)× .34]} = $54,748.42NPV_Optimistic = -$90,000 - 11,200 + $54,748.42/1.11 + $54,748.42/1.11² + {$54,748.42 + 11,200 + [$39,000 × (1 - .34)]}/1.11³ = $59,599.73

Question 7

You are considering a new project.The project has projected depreciation of $820,fixed costs of $5,000,and a sales price of $13.49.The variable cost per unit is $6.44.Ignore taxes.What is the accounting break-even level of production?

Accepted Answer

Accounting break-even point = ($5,000 + 820)/($13.49 - 6.44)= 825.53 units

Question 8

A project has an accounting break-even point of 2,239 units.The fixed costs are $4,200 and the projected variable cost per unit is $23.30.The project requires an initial investment in fixed assets of $1,200 that will be depreciated straight-line to zero over the 4-year life of the project.What is the projected sales price?

Accepted Answer

Accounting break-even Q = 2,239 = [$4,200 + ($1,200/4)]/($P - 23.30)P = $25.31

Question 9

At a production level of 4,800 units a project has total cash costs of $102,600.The variable cost per unit is $11.46 and depreciation is $8,600.What is the amount of the total fixed costs?

Accepted Answer

Total fixed cost = $102,600 - (4,800 × $11.46)= $47,592

Question 10

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?

Accepted Answer

OCF_{FC = $32,000} = {[12,000 × ($14 - $7)] - $32,000}(1 - .34)+ [($90,000/3)× .34] = $44,520

Question 11

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow under the optimistic case scenario?

Accepted Answer

OCF_Optimistic = {(12,000 × 1.04)× [($14 × 1.05)- ($7 × .94)] - ($36,000 × .94)}{(1 - .34)+ [($90,000/3)× .34]} = $54,748.42

Question 12

At a production level of 6,500 units a project has earnings before interest and taxes of $67,385.Depreciation is $10,300 and fixed costs are $41,200.What is the variable cost per unit if the sales price per unit is $34.50?

Accepted Answer

EBIT = $67,385 = 6,500($34.50 - VC)-$41,200 - 10,300VC = $16.21

Question 13

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the contribution margin for a sensitivity analysis using a variable cost per unit of $8?

Accepted Answer

Contribution margin = $14 - 8 = $6

Question 14

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the earnings before interest and taxes estimate under the expected case scenario?

Accepted Answer

EBIT_Expected = [12,000 × ($14 - 7)] - $36,000 - ($90,000/3)= $18,000

Question 15

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the net income under the pessimistic case scenario?

Accepted Answer

Net income for worst case = ({(12,000 × .96)× [($14 × .95)- ($7 × 1.06)]} - ($36,000 × 1.06)- ($90,000/3))× (1 - .34)= -$278.78

Question 16

The accounting break-even production quantity for a project is 6,425 units.The fixed costs are $51,600 and the contribution margin is $9.What is the projected depreciation expense?

Accepted Answer

Depreciation at the accounting break-even = (6,425 × $9)- $51,600 = $6,225

Question 17

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
What is the sales revenue under the pessimistic case scenario?

Accepted Answer

Sales revenue_Pessimistic = 4,500 × .89 × $22 × .98 = $86,347.80

Question 18

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
What is management's best guess of the contribution margin value?

Accepted Answer

Contribution margin_{Base case} = $22 - 13 = $9

Question 19

A proposed project has fixed costs of $213,800,depreciation expense of $91,500,and a sales quantity of 4,500 units.Ignore taxes.What is the contribution margin if the projected level of sales is the accounting break-even point?

Accepted Answer

Contribution margin = ($213,800 + 91,500)/4,500 = $67.84

Question 20

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
If the company conducts a sensitivity analysis using a variable cost of $12,what will the total variable cost estimate be?

Accepted Answer

Total variable cost_{VC = $12} = $12 × 4,500 = $54,000

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