52.
|
You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could:
Refer to section 11.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
53.
|
Which one of the following characteristics best describes a project that has a low degree of operating leverage?
Refer to section 11.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
54.
|
Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?
Refer to section 11.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
55.
|
The degree of operating leverage is equal to:
Refer to section 11.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
56.
|
Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year. This is an example of:
Refer to section 11.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 How capital rationing affects the ability of a company to accept projects. Section: 11.6 Topic: Soft rationing |
57.
|
Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as:
Refer to section 11.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 How capital rationing affects the ability of a company to accept projects. Section: 11.6 Topic: Soft rationing |
58.
|
The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:
Refer to section 11.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-05 How capital rationing affects the ability of a company to accept projects. Section: 11.6 Topic: Hard rationing |
59.
|
Precise Machinery is analyzing a proposed project. The company expects to sell 2,300 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, plus or minus 3 percent. What is the sales revenue under the worst case scenario?
SalesWorst case = (2,300 × 0.95) × ($750 × .97) = $1,589,588
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
60.
|
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the contribution margin per unit under the best case scenario?
Contribution marginbest case = ($750 × 1.02) - ($260 × 0.96) = $515.40
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Contribution margin |
61.
|
Precise Machinery is analyzing a proposed project. The company expects to sell 2,250 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the amount of the total costs per unit under the worst case scenario?
Total costs per unitworst case = [(2,250 × 0.95) (260 × 1.03) + ($589,000 × 1.03)]/(2,250 × 0.95) = $551.62
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
62.
|
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755. What is the operating cash flow based on this analysis?
OCF {[($755 - $260) × 2,100] - $589,000} {1 - 0.35} + ($129,000 × 0.35) = $337,975
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. Section: 11.2 Topic: Sensitivity analysis |
63.
|
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $775 per unit, give or take 2 percent. The tax rate is 34 percent. The company is conducting a sensitivity analysis with fixed costs of $590,000. What is the OCF given this analysis?
OCF {[($775 - $260) × 2,100] - $590,000} {1 - 0.34} + ($129,000 × 0.34) = $368,250
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. Section: 11.2 Topic: Sensitivity analysis |
64.
|
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, plus or minus 3 percent. What is the earnings before interest and taxes under the base case scenario?
EBIT for base case = [8,000 × ($64 - $11)] - $287,000 - $68,000 = $69,000
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
65.
|
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 4 percent. The expected variable cost per unit is $11 and the expected fixed costs are $290,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the operating cash flow under the best case scenario?
OCFbest case = {{[($64 × 1.03) - ($11 × 0.95)] × (8,000 × 1.04)} - ($290,000 × 0.95)} {1 - 0.32} + ($68,000 × 0.32) = $148,247
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
66.
|
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the net income under the worst case scenario?
Net incomeworst = {{[($64 × 0.97) - ($11 × 1.05)] × (8,000 × 0.98)} - ($287,000 × 1.05) - $68,000} {1 - 0.32} = $18,228
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
67.
|
Stellar Plastics is analyzing a proposed project. The company expects to sell 12,000 units, plus or minus 5 percent. The expected variable cost per unit is $3.20 and the expected fixed costs are $30,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $24,000. The tax rate is 34 percent. The sales price is estimated at $7.50 a unit, plus or minus 4 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?
OCF = [(12,000 × ($7.50 - $3.20)] - $31,000][1 - 0.34] + ($24,000 × 0.34) = $21,756
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. Section: 11.2 Topic: Sensitivity analysis |
68.
|
Sunset United is analyzing a proposed project. The company expects to sell 15,000 units, plus or minus 4 percent. The expected variable cost per unit is $120 and the expected fixed costs are $311,000. The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $74,000. The tax rate is 35 percent. The sales price is estimated at $170 a unit, plus or minus 2 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?
Contribution margin = $170 - $125 = $45
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. Section: 11.2 Topic: Sensitivity analysis |
69.
|
Your company is reviewing a project with estimated labor costs of $21.20 per unit, estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a month. Sales are projected at 42,000 units over the one-year life of the project. All estimates are accurate within a range of plus or minus 4 percent. What are the total variable costs for the worst-case scenario?
Total variable costs = [($21.20 + $37.18) × 1.04][42,000 × 0.96] = $2,448,037
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.3 Topic: Scenario analysis |
70.
|
A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit?
[16,000 × ($29 - v)] - $52,000 - $12,000 = $14,600; v = $24.09
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.3 Topic: Scenario analysis |
71.
|
At a production level of 4,500 units, a project has total costs of $107,000. The variable cost per unit is $12.50. Assume the firm can increase production by 1,000 units without increasing its fixed costs. What will the total costs be if 4,800 units are produced?
Total cost = [$107,000 - ($12.50 × 4,500)] + (4,800 × $12.50) = $110,750
|
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.3 Topic: Total costs |
72.
|
A company is considering a project with a cash break-even point of 22,600 units. The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000. What is the projected amount of fixed costs?
FCcash break-even = 22,600 × ($28 - $13) = $339,000
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Cash break-even point |
73.
|
At the accounting break-even point, Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each. At this level of production, the depreciation is $58,000 and the variable cost per unit is $4. What is the amount of the fixed costs at this production level?
Fixed costsaccounting break-even = [14,600 × ($12 - $4)] - $58,000 = $58,800
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
74.
|
The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups. The sales price is $1.49 per cup while the variable cost per cup is $0.63. How many cups of coffee must it sell to break-even on a cash basis?
Qcash break-even = ($0.34 × 212,000)/($1.49 - $0.63) = 83,814 cups
|
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Cash break-even |
75.
|
The Metal Shop produces 1.8 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $320,000 and its total costs are $522,000. The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit. A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.10. Should the firm sell the additional units at the offered price? Why or why not?
Variable cost per unit = ($522,000 - $320,000)/1,800,000 = $0.112 per unit
The marginal cost per unit will be $0.112 since the variable cost per unit will be unchanged. The order should not be accepted since the marginal cost per unit exceeds the offered price. |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Marginal cost |
76.
|
Wexford Industrial Supply is considering a new project with estimated depreciation of $26,000, fixed costs of $79,000, and total sales of $187,000. The variable costs per unit are estimated at $11.80. What is the accounting break-even level of production?
Qaccounting break-even = ($79,000 + $26,000)/[($187,000/Q) - $11.80]
Q = 6,949 units |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
77.
|
The accounting break-even production quantity for a project is 12,320 units. The fixed costs are $216,000 and the contribution margin per unit is $28. The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 5-year life. What is the amount of fixed assets required for this project?
Depreciationaccounting break-even = (12,320 × $28) - $216,000 = $128,960
Fixed asset cost = $128,960 × 5 = $644,800 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
78.
|
A project has an accounting break-even point of 15,329 units. The fixed costs are $382,000 and the projected variable cost per unit is $29.10. The project will require $780,000 for fixed assets which will be depreciated straight-line to zero over the project's 6-year life. What is the projected sales price per unit?
15,329 = [$382,000 + ($780,000/6)]/(P - $29.10); P = $62.50
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
79.
|
A proposed project has fixed costs of $9,800, depreciation expense of $2,550, and a sales quantity of 2,100 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?
Contribution margin = ($9,800 + $2,550)/2,100 = $5.88
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
80.
|
Spencer Tools would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project. The fixed costs are estimated at $21,000, the depreciation expense is $11,000, and the contribution margin per unit is $12.50. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?
Cash break-even point = $21,000/$12.50 = 1,680 units
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Cash break-even |
81.
|
The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit. How many units must the firm sell to break-even on a cash basis?
Qcash break-even = $71,000/($26.50 - $17.90) = 8,256
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Cash break-even |
82.
|
A proposed project has a contribution margin per unit of $13.10, fixed costs of $74,000, depreciation of $12,500, variable costs per unit of $22, and a financial break-even point of 11,360 units. What is the operating cash flow at this level of output?
OCFfinancial break-even = (11,360 × $13.10) - $74,000 = $74,816
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Financial break-even |
83.
|
Cantor's has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $211. The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34 percent and the required rate of return is 11 percent. Should the company develop the new product? Why or why not?
Financial break-even point = ($329,000 + $218,200)/$211 = 2,593.36 units
Expected sales = 110,000 × 0.025 = 2,750 units. The project should be accepted because the expected level of sales is greater than the financial break-even quantity. |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Financial break-even |
84.
|
Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000. The operating cash flow is $19,700. What is the break-even quantity?
Qfinancial break-even = ($32,000 + $19,700)/($38 - $18.50) = 2,651 units
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Financial break-even |
85.
|
You are in charge of a project that has a degree of operating leverage of 2.64. What will happen to the operating cash flows if the number of units you sell increase by 4 percent?
Percentage change in OCF = 2.64 × 0.04 = 10.56 percent increase
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
86.
|
The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent. What is the degree of operating leverage if the contribution margin per unit is $47?
DOL = 0.053/0.02 = 2.65
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
87.
|
Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000. What is the degree of operating leverage for this project?
Degree of operating leverage = 1 + ($769,000/$241,000) = 4.19
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
88.
|
You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent. Due to the current state of the economy, you expect sales to decrease by 7 percent next year. What change should you expect in the operating cash flows next year given your sales prediction?
Percentage change in OCF = 2.8 × (-0.07) = -0.196 = 19.60 percent decrease
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
89.
|
Cool Shades, Inc. (CSI) manufactures biotech sunglasses. The variable materials cost is $1.69 per unit, and the variable labor cost is $3.04 per unit. Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit. What is the cash break-even point?
QCash Break-even = $750,000/($11.50 - $1.69 - $3.04) = 110,783 units
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 11-1 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Cash break-even |
90.
|
Mountain Gear can manufacture mountain climbing shoes for $15.25 per pair in variable raw material costs and $18.46 per paid in variable labor costs. The shoes sell for $135 per pair. Last year, production was 170,000 pairs and fixed costs were $830,000. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs?
Marginal total revenue = 10,000 × ($15.25 + $18.46) = $337,100
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 11-2 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Marginal cost |
91.
|
We are evaluating a project that costs $854,000, has a 15-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 154,000 units per year. Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±14 percent. What is the worst-case NPV?
OCFWorst = {[($41 × 0.86) - ($20 × 1.14)][154,000 × 0.86] - ($865,102 × 1.14)}{1 - 0.33) + ($854,000/15)(0.33) = $463,658.70
|
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 11-6 Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
92.
|
A project has a unit price of $5,000, a variable cost per unit of $3,750, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity?
QAccounting break-even = ($17,000,000 + $6,970,000)/($5,000 - $3,750) = 19,176 units
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 11-7 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 Topic: Accounting break-even |
93.
|
A project has the following estimated data: price = $74 per unit; variable costs = $39.22 per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000; life = 4 years. Ignore the effect of taxes. What is the degree of operating leverage at the financial break-even level of output?
DOL = 1 + (6,500/$2,415.37) = 3.691 |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 11-9 Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
94.
|
Consider a project with the following data: accounting break-even quantity = 29,000 units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000; variable costs = $24 per unit; required return = 14 percent; depreciation = straight line. Ignoring the effect of taxes, what is the financial break-even quantity?
16,250 = $203,000/(P - $24); P = $36.4923077
29,000 = ($203,000 + D)/($36.4923077 - $24); D = $159,276.923 Initial investment = 10 × $159,276.923 = $1,592,769.23 QF = ($203,000 + $305,355.43)/($36.4923077 - $24) = 40,693.47 units |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 11-10 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 and 11.4 Topic: Break-even analysis |
95.
|
At an output level of 50,000 units, you calculate that the degree of operating leverage is 1.8. What will be the percentage change in operating cash flow if the new output level is 54,500 units?
DOL = 1.8 = Percentage change in OCF/[54,500 - 50,000)/50,000]; %ΔOCF = 16.20 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 11-11 Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
96.
|
A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $58,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500?
DOL = 1 + ($36,000/$58,000) = 1.62068966
Percentage change in Q = (18,500 - 18,000)/18,000 = 2.7778 percent At 18,500 units, percentage change in OCF = 1.62068966 × .027778 = 4.501916 percent New OCF = $58,000 × (1 + 0.04501916) = $60,611.11 At 18,500 units, DOL = 1 + ($36,000/$60,611.11) = 1.59 |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 11-13 Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project. Section: 11.5 Topic: Degree of operating leverage |
97.
|
Consider a 6-year project with the following information: initial fixed asset investment = $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units; tax rate = 32 percent. What is the sensitivity of OCF to changes in quantity sold?
OCF = [($34 - $19) × 90,528 - 188,600][1 - 0.32] + [($460,000/6) × 0.32] = $819,670.93
Using 91,528 units: (You can use any amount as the second level of quantity sold as the sensitivity will be the same.) OCF = [($34 - $19) × 91,528 - 188,600][1 - 0.32] + [($460,000/6) × 0.32] = $829,870.93 Sensitivity = ($829,870.93 - $819,670.93)/(91,528 - 90,528) = $10.20 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 11-17 Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. Section: Analysis Topic: Sensitivity analysis |
98.
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You are considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The required return is 12 percent and the relevant tax rate is 34 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent. What is the worst case NPV?
Unit salesWorst = 160 (1 - 0.09) = 145.6 units
Variable cost per unitWorst = $12,000 (1 + 0.09) = $13,080 Fixed costsWorst = $283,000 (1 + 0.09) = $308,470 OCFWorst = [($24,000 - $13,080)(145.6) - $308,470][1 - 0.34] + 0.34($630,000/5) = $888,618.12 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 11-19 Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Scenario analysis |
99.
|
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR?
Sales = ($500 × 58,000) + ($700 × (-15,000)) + $200 × 9,000) = $20,300,000
Variable costs = (-$200 × 58,000) + (-$300 × (-15,000)) + (-$100 × 9,000) = -$8,000,000 Depreciation = $21,000,000/7 = $3,000,000 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 11-20 Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: Project IRR |
100.
|
Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a traditional gasoline engine. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model. The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model. Assume the appropriate interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years. What price per gallon would make the decision to buy they hybrid worthwhile?
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AACSB: Analytic
Blooms: Evaluate Difficulty: 2 Medium EOC: 11-23 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Break-even analysis |
101.
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In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion developing its B490, which is capable of carrying 800 passengers. The plane has a list price of $275 million. In discussing the plane, Hiro Airplanes stated that the company would break-even when 246 B490s were sold. Assume the break-even sales figure given is the cash flow break-even. Suppose the sales of the B490 last for only 9 years. How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment?
Cash flow per plane = $12,680,000,000/246 = $51,544,715
C = Annual cash flow necessary to deliver a 19 percent return |
AACSB: Analytic
Blooms: Evaluate Difficulty: 2 Medium EOC: 11-24 Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.4 Topic: Break-even analysis |
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