125,000    

 

 

 

 

50

 

 

5,000,000

 

 

1,000,000

 

16,000    

 

 

60

 

 

 

 

1)       You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

 

 Sales price per abalone

 =

 $34.60

 

Variable costs per abalone

 =

 $5.70

 

Fixed costs per year

 =

 $371,000

 

Depreciation per year

 =

 $116,000

 

Tax rate

 =

 34%

 

 The discount rate for the company is 13 percent, the initial investment in equipment is $696,000, and the project’s economic life is six years. Assume the equipment is depreciated on a straight-line basis over the project’s life.

 

 a.

 

What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number (e.g., 32).)

 

b.

What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number (e.g., 32).)

2)       Consider a four-year project with the following information: initial fixed asset investment = $560,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28; variable costs = $20; fixed costs = $200,000; quantity sold = 86,000 units; tax rate = 35 percent.

  

How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

 

  

   
 

   

  
 

4)       Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,000,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $300 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $220,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $360 per ton. The engineering department estimates you will need an initial net working capital investment of $200,000. You require a return of 10 percent and face a marginal tax rate of 38 percent on this project.

Suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement.

a.

What is the sensitivity of the project OCF to changes in the quantity supplied? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

b.

What is the sensitivity of NPV to changes in quantity supplied? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

c.

Given the sensitivity number you calculated, is there some minimum level of output below which you wouldn’t want to operate? (Do not round intermediate calculations and round your final answer to the nearest whole number.)