Assignment

A project currently generates sales of $3 million, variable costs equal 30% of sales, and fixed costs are $.6 million. The firm's tax rate is 40%. Assume all sales and expenses are cash items.

What are the effects on cash flow, if sales increase from $3 million to $3.3 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)

What are the effects on cash flow, if variable costs increase to 35% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

Finefodder's analysts have come up with the following revised estimates for the Gravenstein store:

Range                                   Pessimistic                  Expected                     Optimistic
Investment                            $ 4,680,000               $ 3,000,000                 $ 2,800,000
Sales                                    13,000,000                 14,000,000                  16,000,000
Variable costs as % of sales    78                              76                              74
Fixed cost                             $ 2,400,000                $ 2,200,000                 $ 1,900,000

Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straight-line over the project's life. Conduct a sensitivity analysis for each variable and range and compute the NPV for each. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not in millions.)

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $40. The fixed costs incurred each year for factory upkeep and administrative expenses are $217,000. The machinery costs $2.6 million and is depreciated straight-line over 10 years to a salvage value of zero.

a. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.)

b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 30%, a 10-year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,000 per year, and variable costs are $35 per unit. The initial investment of $4,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%.

a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. What is the NPV break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

c. What is the accounting break-even level of sales if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

d. What is the NPV break-even level of sales if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

You estimate that your cattle farm will generate $.30 million of profits on sales of $6 million under normal economic conditions and that the degree of operating leverage is 4. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

a. What will profits be if sales turn out to be $4.5 million?
b. What if they are $7.5 million?

Modern Artifacts can produce keepsakes that will be sold for $120 each. Nondepreciation fixed costs are $1,800 per year, and variable costs are $70 per unit. The initial investment of $5,400 will be depreciated straight-line over its useful life of 6 years to a final value of zero, and the discount rate is 18%.

a. What is the degree of operating leverage of Modern Artifacts when sales are $7,440? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the degree of operating leverage when sales are $12,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Why is operating leverage different at these two levels of sales?

An auto plant that costs $140 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $180 million if the line is successful but only $80 million if it is unsuccessful. You believe that the probability of success is only about 30%. You will learn whether the line is successful immediately after building the plant.

a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)

a-2. Would you build the plant?
Yes
No

Suppose that the plant can be sold for $140 million to another automaker if the auto line is not successful.

B 1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

b 2. Would you build the plant?