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CHAPTER 11 - 13
Using the bottom up OCF calculation, we get:
21. The best case and worst cases for the variables are:
Best-case
We will calculate the sales and variable costs first. Since we will lose sales of the expensive clubs and
gain sales of the cheap clubs, these must be accounted for as erosion. The total sales for the new project
will be:
CHAPTER 11 - 14
The pro forma income statement will be:
Using the bottom up OCF calculation, we get:
Worst Case
We will calculate the sales and variable costs first. Since we will lose sales of the expensive clubs and
gain sales of the cheap clubs, these must be accounted for as erosion. The total sales for the new project
will be:
The pro forma income statement will be:
CHAPTER 11 - 15
Using the bottom up OCF calculation, we get:
22. To calculate the sensitivity of the NPV to changes in the price of the new club, we simply need to
The pro forma income statement will be:
CHAPTER 11 - 16
And the NPV is:
$160,657.82.
To calculate the sensitivity of the NPV to changes in the quantity sold of the new club, we simply need
For the variable costs, we must include the units gained or lost from the existing clubs. Note that the
The pro forma income statement will be:
CHAPTER 11 - 17
Using the bottom up OCF calculation, we get:
23. a. First we need to determine the total additional cost of the hybrid. The hybrid costs more to
CHAPTER 11 - 18
b. First, we need to determine the total miles driven over the life of either vehicle, which will be:
Now we can find the price per gallon for the miles driven. If we let P be the price per gallon, the
necessary price per gallon will be:
c. To find the number of miles it is necessary to drive, we need the present value of the costs and
Solving this equation for the cost savings per gallon of gas necessary for the hybrid to break even
from a financial sense, we find:
CHAPTER 11 - 19
24. a. The cash flow per plane is the initial cost divided by the breakeven number of planes, or:
b. In this case the cash flows are a perpetuity. Since we know the cash flow per plane, we need to
determine the annual cash flow necessary to deliver a 20 percent return. Using the perpetuity
equation, we find:
c. In this case the cash flows are an annuity. Since we know the cash flow per plane, we need to
Challenge
25. a. The tax shield definition of OCF is:
CHAPTER 11 - 20
b. The cash breakeven is:
And the accounting breakeven is:
c. At the accounting breakeven point, the net income is zero. Thus using the bottom up definition of
OCF:
26. The DOL is expressed as:
CHAPTER 11 - 21
27. a. Using the tax shield approach, the OCF is:
b. In the worst-case, the OCF is:
The best-case OCF is:
28. To calculate the sensitivity to changes in quantity sold, we will choose a quantity of 26,000. The
OCF at this level of sales is:
CHAPTER 11 - 22
The sensitivity of changes in the OCF to quantity sold is:
And the sensitivity of NPV to changes in the quantity sold is:
29. At the cash breakeven, the OCF is zero. Setting the tax shield equation equal to zero and solving for
the quantity, we get:
CHAPTER 11 - 23
30. Using the tax shield approach to calculate the OCF, the DOL is:
