Chapter 9 – Concepts Review and Critical Thinking Quesetions 1 & 7

When you see something highlighted in yellow – that is where I want you to put an answer.

Chapter 9 – Concepts Review and Critical Thinking Quesetions 1 & 7

#1 ANSWER

#7.

a. ANSWER

b.ANSWER

c. ANSWER

Chapter 9 – Questions and Problems

#14

You will need to compute the NPV and IRR of this project. Please see my excel help below.

A. ANSWER based on NPV

B. ANSWER based on calculation of IRR

Problem 17

a. Payback is pretty easy to determine – ANSWER in number of years

Project A

Project B

b. Discounted payback needs to have some computations done –ANSWER BASED ON YOUR CALCULATIONS (see below) – Answer in Number of years

Discounted Payback Project A

Discounted Paback Project B

c. Net Present Value using Excel. This is an example. You can do this with both cash flows to see which one is better – ANSWER BASED ON COMPUTING THE NPV (see example below)

NPV Project A

NPV Project B

NPV
Year	Cash Flow A	Cash Flow B
0	-350000	-50000
1	45000	24000
2	65000	22000
3	65000	19500
4	440000	14600
	PUT THE FORMULA HERE	PUT THE FORMULA HERE

	NPV EXAMPLE
Year
0	(100,000.00)
1	5,000.00
2	55,000.00
3	(4,000.00)
4	49,000.00
	($28,678.43)
	The NPV formula would be =NPV(.15,5000,55000,-4000,49000)-100000
	First you put in =NPV(
	It asks for rate = .15
	It asks for values
	Put each value in STARTING WITH YEAR 1
	separate with a comma
	End the parenthesis
	Subtract the beginning amount in YEAR 0.
	That is your NPV

d. IRR is very easy in excel. Here is an example you should do on both problems. ANSWER BASED ON IRR CALCULATION (See example below)

IRR Project A

IRR Project B

	IRR EXAMPLE
Year
0	(100,000.00)
1	5,000.00
2	55,000.00
3	(4,000.00)
4	49,000.00
	2%
	The IRR formula is very easy
	First you put in =IRR(
	DO NOT CONSIDER RATE IN THIS FORMULA. It is telling you the rate (the internal rate)
	In this formula you DO PUT IN THE STARTING YEAR 0
	I put in B76:B80 because on my excel sheet that was the location of these values
	Close the parenthesis
	This is your IRR

E. Profitability Index defined as the present value of the future cash flows divided by the initial investment. ANSWER BASED ON CALCULATION. SEE EXAMPLE BELOW

Profitability Index Project A

Profitability Index Project B

Profitability Index
Year
0	(100,000.00)		Year zero is y our initial investment. Do not include this yet
1	5,000.00
2	55,000.00
3	(4,000.00)
4	49,000.00
	71321.57
	=npv(rate,value1,value2,value3,value4)
	=NPV(0.15,5000,55000,-4000,49000)
	Divide the starting figure in year 0
	Divide 71,321.47/100,000
	This is the profitability index.

CHAPTER 10

When you see something highlighted in yellow – that is where I want you to put an answer.

Concepts Review and Critical Thinking Questions

#5 ANSWER

3 questions

#6 ANSWER

QUESTIONS AND PROBLEMS

PROBLEM #1 (Hint), the original cost is not considered because it is a sunk cost. Use the value today.

#1 ANSWER

#2 ANSWER

Sales of the new product line (portable camper):

(25,000 Units) x ($14,000 per Unit) =

Increased sales of the motor homes due to the new portable camper introduction:

(2,400 Units) x ($68,000) =

Decreased sales of motor coaches due to the new portable camper introduction:

(1,100 Units) x ($105,000 per Unit) = (this will be a negative number)

So, when evaluating this project, the amount to use as the annual sales is:

X+X+X=XX

#4 To find the OCF, we need to complete the income statement as follows:

Sales $ 682,900

Costs 437,800

Depreciation 110,400

EBIT $ ?

Taxes@34% ?

Net income $ ?

The OCF for the company is:

OCF = EBIT + Depreciation – Taxes

OCF = ????

The depreciation tax shield is the depreciation times the tax rate, so:

Depreciation tax shield = T(Depreciation)

Depreciation tax shield = ?

#9 Using the tax shield approach to calculating OCF

OCF = (Sales – Costs)(1 – T) + T(Depreciation)

OCF = ????

CHAPTER 11

CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS

#7. Use the readings and videos to help you in answering this question.

#9. Use the readings and videos to help you in answering this question.

QUESTIONS AND PROBLEMS

Chapter 11

Problems #1, #2, #3, #7

When you see something highlighted in yellow – that is where I want you to put an answer.

1. a. The total variable cost per unit is the sum of the two variable costs, so:

Total variable costs per unit = Cost 1 + Cost 2

b. The total costs include all variable costs and fixed costs. We need to make sure we are including all variable costs for the number of units produced, so:

Total costs = Variable costs + Fixed costs

Total costs = XXXX

c. The cash breakeven, that is the point where cash flow is zero, is:

QC = Fixed Costs / (Selling Price – Variable Cost)

QC = xxxxx units

And the accounting breakeven is:

QA = (Fixed Costs + depreciation)/ (Selling price-Variable cost)

QA = XXXX units

2. The total costs include all variable costs and fixed costs. We need to make sure we are including all variable costs for the number of units produced, so:

Total costs = Be sure to include the variable and fixed costs x number produced and then add in fixed costs.

Total costs = XXXX

The marginal cost, or cost of producing one more unit, is the total variable cost per unit, so:

(this is the same as the variable cost per unit)

Marginal cost = XXXX

The average cost per unit is the total cost of production, divided by the quantity produced, so:

Average cost = Total cost / Total quantity

Average cost = XXXX

Minimum acceptable total revenue = XXXX (how much it costs to make those 5000 pairs)

3. The base-case, best-case, and worst-case values are shown below. Remember that in the best-case, sales and price increase, while costs decrease. In the worst-case, sales and price decrease, and costs increase.

Unit

Scenario Unit Sales Unit Price Variable Cost Fixed Costs

Base XXX XXXX XXX XXX

Best XXX XXXX XXX XXX

Worst XXX XXXX XXX XXX

7. The cash breakeven equation is:

QC = FC/(P – v)

And the accounting breakeven equation is:

QA = (FC + D)/(P – v)

Using these equations, we find the following cash and accounting breakeven points:

a. QC = XXXX QA = XXXX

b. QC = XXXX QA = XXXX

c. QC = XXXX QA = XXXX

PAYBACK METHOD

First you need to look at the amounts going out and the amounts coming in.

How long will it take you to pay off the initial investment?

Here’s a short example that you can follow for your assignment

YearAmt paid back

how much

more to go?

0-150000

14000040000-110000we paid back 40,000, but we still “owe” 110,000

23500075000-75000we paid back 75,000 total but we still ‘owe” 75,000

3120000what portion of 120,000 do we need to get to 75,000?

2.63 years 75,000/120,0000.625

DISCOUNTED PAYBACK METHOD

15%Cash Flow ACash Flow ACash Flow BCash Flow B

YearCash Flow ACash Flow BUndiscountedDiscountedUndiscountedDiscounted

0-350000-50000

1450002400045000$39,130.4324000put in formula to compute present value

2650002200065000$49,149.3422000put in formula to compute present value

3650001250065000$42,738.5612500put in formula to compute present value

444000014600440000$251,571.4314600put in formula to compute present value

HOW MANY YEARS???HOW MANY YEARS???

How do you get to the discounted cash flows? You have to use the PV formula in Excel

=PV(0.15,1,0,-45000,0)

Always start the formula with an = sign. Once you put in the PV and ( you will see some instructions.

First it asks for rate. Here I put in .15.

Then put in a comma

Then it asks for NPER. This is the number of periods. I put in 1. The reason I put in 1 was that I wanted the PV of 45,000 in 1 year

(When you compute for year2, you will put in 2, year 3, 3 etc)

Comma

Now it is asking for the payment. We do not have a payment, so put in 0

Comma

Now it’s asking for the amount you want the present value on.

I put in -45000. (you need to put in the negative sign because it is money going away from you)

comma

put in a zero at the end

close the Parenthesis )