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?
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?
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?
98.
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?
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?
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?
101.
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?
Essay Questions
102.
What is operating leverage and why is it important in the analysis of capital
expenditure projects?
103.
What is forecasting risk and why is it important to the analysis of capital
expenditure projects? What methods can be used to reduce this risk?
104.
What are the key features of the accounting, cash, and financial break-even
points?
105.
Assume that a country experiences a financial crisis that causes the
nation’s financial markets to freeze in a manner that prevents a private firm
from raising capital from any source. Explain how project analysis
conducted by that firm would work in this situation.
106.
Mr. Bear, your boss, will only agree to accept a project that, as a minimum,
provides a rate of return equal to the requirement he has set for the project.
Given this, explain how you can use break-even analysis to ascertain which
projects will be acceptable to him as you don’t want to risk hearing him
growl if you waste his time presenting him with a project that is
unacceptable.