Project #94539 - NPV & Project Analysis (Finance Formulas)

 NPV:

1 The following are the cash flows of two projects:

 

Year

Project A

Project B

0

−$260       

−$260       

1

140       

160       

2

140       

160       

3

140       

160       

4

140       

 


 

a.

If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Project

NPV         

A

$  

B

 


 

b.

Which of these projects is worth pursuing?

 

 

 

Project A

Project B

Both

Neither

 

2 The following are the cash flows of two projects:

 

Year

Project A

Project B

 

0

−$370       

−$370       

 

1

200       

270       

 

2

200       

270       

 

3

200       

270       

 

4

200       

 

 

 

 


 

 a.

Calculate the NPV for both projects if the discount rate is 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

 Project

NPV        

 

 

A

$  

 

 

B

 

 

 


 

             

 

3 The following are the cash flows of two projects:

Year

 

Project A

 

Project B

 

 

0

 

$

210

 

 

$

210

 

 

 

1

 

 

 

90

 

 

 

 

110

 

 

 

2

 

 

 

90

 

 

 

 

110

 

 

 

3

 

 

 

90

 

 

 

 

110

 

 

 

4

 

 

 

90

 

 

 

 

 

 

 

 


 

 

 If the opportunity cost of capital is 12%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

 Project

Profitability index

 

A

 

B

 

                             

 

4 The following are the cash flows of two projects:

 

Year

Project A

Project B

0

−$300       

−$300       

1

180       

200       

2

180       

200       

3

180       

200       

4

180       

 


 

What is the payback period of each project? (Round your answers to 2 decimal places.)

Project

Payback Period         

 

A

years

 

B

 years

 

 

5 A project that costs $3,200 to install will provide annual cash flows of $900 for each of the next 6 years.

Calculate the NPV if the discount rate is 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

   NPV

$

 

 

How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Discount rate

%

 

6 A new computer system will require an initial outlay of $17,000, but it will increase the firm’s cash flows by $3,400 a year for each of the next 7 years.

 

a.

Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%. What if it is 15%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Rate of Return

 

NPV        

Worth Installing    

10%         

$

   

  

 

 

 

 

 

 

 

 

15%         

$

 

  

 

 

       

 

 

       

 

 


 

b.

How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

             

 

  Maximum discount rate

%

 

7 Here are the cash flows for a project under consideration:

 

 

C0

 

C1

 

C2

 

$

7,230

 

+

$

5,100

 

+

$

18,720

 


                       

 

a.

Calculate the project’s net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

 

  Discount rate

Net present value  

      0%

$   

    50%

$   

  100%

$   


 

b.

What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)

 

  IRR

%

 

8 Consider projects A and B with the following cash flows:

 

 

 

C0

 

C1

 

C2

 

C3

 

  A

 

$

43

 

+

$

27

 

+

$

27

 

+

$

27

 

  B

 

 

68

 

+

 

37

 

+

 

37

 

+

 

37

 


 

a-1.

What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

  Project

NPV

A

$

B

$


 

a-2.

Which project has the higher NPV?

 

 

 

Project A

Project B

 

b-1.

What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Project

Profitability index    

A

      

B

  

 

9 Here are the expected cash flows for three projects:

 

 

Cash Flows (dollars)

Project

Year:

0

 

1

 

2

 

3

 

4

 

A

 

5,300

 

+

1,075

 

+

1,075

 

+

3,150

 

 

0

 

B

 

1,300

 

 

0

 

+

1,300

 

+

2,150

 

+

3,150

 

C

 

5,300

 

+

1,075

 

+

1,075

 

+

3,150

 

+

5,150

 


 

a.

What is the payback period on each of the projects?

 

  Project

Payback period

A

years

B

years

C

years


 

b.

If you use a cutoff period of 2 years, which projects would you accept?

 

 

 

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

 

c.

If you use a cutoff period of 3 years, which projects would you accept?

 

 

 

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

 

d-1.

If the opportunity cost of capital is 12%, calculate the NPV for projects A, B, and C. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Project

NPV

A

$

B

$

C

$


 

d-2.

Which projects have positive NPVs?

 

 

 

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

 Subject Project Analysis:

1 In a slow year, Deutsche Burgers will produce 2.9 million hamburgers at a total cost of $4.3 million. In a good year, it can produce 4.9 million hamburgers at a total cost of $5.5 million.

 

a.

What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

 

  Fixed cost

$ million  

 

b.

What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Variable cost

$ per burger  

 

c.

What is the average cost per burger when the firm produces 2 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Average cost

$ per burger  

 

d.

What is the average cost per burger when the firm produces 3 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Average cost

$ per burger  

 

2 A project currently generates sales of $19 million, variable costs equal 40% of sales, and fixed costs are $3.8 million. The firm’s tax rate is 35%. Assume all sales and expenses are cash items.

 

a.

What are the effects on cash flow, if sales increase from $19 million to $20.9 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)

 

  Cash flow

 

by $

 

b.

What are the effects on cash flow, if variable costs increase to 50% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

 

  Cash flow

by $

 

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

 

 

Range

 

 

Pessimistic

 

Expected

 

Optimistic

 

  Investment

$

5,400,000

 

 

$

5,280,000

 

 

$

5,160,000

 

 

  Sales

 

12,000,000

 

 

 

16,000,000

 

 

 

22,000,000

 

 

  Variable costs as % of sales

 

70

 

 

 

69

 

 

 

67

 

 

  Fixed cost

$

2,200,000

 

 

$

1,900,000

 

 

$

1,700,000

 

 


 

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.)

  

 

NPV of Gravenstein Store

 

Pessimistic

Expected

Optimistic

  Investment

$  

$  

$  

  Sales

$  

$  

$  

  Variable costs as % of sales

$  

$  

$  

  Fixed cost

$  

$  

$

 

4 The following estimates have been prepared for a project:

Fixed costs: $5,400

Depreciation: $3,600

Sales price per unit: $3

Accounting break-even: 50,000 units

 

What must be the variable cost per unit? (Round your answer to 2 decimal places.)

 

  Variable cost

$ per unit

 

5 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 $208,000. The machinery costs $1.7 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.)


 

  Break-even sales

diamonds per year  


 

b.

What is the NPV break-even level of diamonds sold per year assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)


 

  Break-even sales

diamonds per year

 

Skip #6

 

7 Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $1,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 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.)

 

  Acounting break-even level of sales

units  

 

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.)

 

  NPV break-even level of sales

units  

 

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.)

 

  Acounting break-even level of sales

units  

 

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.)

 

  NPV break-even level of sales

units  

 

8  You estimate that your cattle farm will generate $.25 million of profits on sales of $5 million under normal economic conditions and that the degree of operating leverage is 2. (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 $2.5 million?

 

  Profit will

 

 

Decrease to

$ million.  

 

b.

What if they are $7.5 million?

 

  Profit will

 

 

Increase to

$ million.

 

9 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.)

 

  Degree of operating leverage

 

 

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.)

 

  Degree of operating leverage

 

 

10. A silver mine can yield 14,000 ounces of silver at a variable cost of $30 per ounce. The fixed costs of operating the mine are $63,000 per year. In half the years, silver can be sold for $46 per ounce; in the other years, silver can be sold for only $23 per ounce. Ignore taxes.


 

a.

What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined? (Do not round intermediate calculations.)


 

  Average cash flow

$  


 

b.

Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine. Assume fixed costs are incurred only if the mine is operating. (Do not round intermediate calculations.)


 

  Average cash flow

$  

 

11 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.)

 

  Expected NPV

$ million

 

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.)

 

  Expected NPV

$ million  

 

 

 

 

 

Subject Business
Due By (Pacific Time) 11/21/2015 11:59 pm
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