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Unformatted text preview: 4/14/2017 Assignment Print View Score: 3/10 Points 30 % 1/21 4/14/2017 1. Assignment Print View Award: 0 out of 0.50 points In a slow year, Deutsche Burgers will produce 3.5 million hamburgers at a total cost of $5.3 million. In a good year, it can produce 5.5 million hamburgers at a total cost of $6.2 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.) $ 32.0 Fixed cost million b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.) $ 21.00 Variable cost per burger c. 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.) $ 25.00 Average cost per burger d. What is the average cost per burger when the firm produces 4 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.) $ 11.00 Average cost per burger e. Why is the average cost lower when more burgers are produced? Fixed costs are constant per burger. rev: 11_27_2015_QC_CS­34293, 01_13_2016_QC_CS­37800 References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. In a slow year, Deutsche Burgers will produce 3.5 million hamburgers at a total cost of $5.3 million. In a good year, it can produce 5.5 million hamburgers at a total cost of $6.2 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 3.7 ± 1% million $ b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Variable cost .45 ± .01 per burger $ c. 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 $ 1.68 ± 1% per burger d. What is the average cost per burger when the firm produces 4 million hamburgers? (Do not round 2/21 4/14/2017 Assignment Print View intermediate calculations. Round your answer to 2 decimal places.) Average cost $ 1.38 ± 1% per burger e. Why is the average cost lower when more burgers are produced? The fixed costs are spread across more burgers. rev: 11_27_2015_QC_CS­34293, 01_13_2016_QC_CS­37800 Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. The extra 2.0 million burgers increase total costs by $.9 million. Therefore, variable cost = $.9 million / 2.0 million burgers or $.45 per burger. $5.3 million = (3.5 million burgers × $.45) + Fixed costs Fixed costs = $3.7 million a. Fixed costs = $3.7 million b. Variable costs = $.45 per burger c. Total cost = (3 million burgers × $.45) + $3.7 million = $5.1 million Average cost = $5.1 million / 3.0 million burgers = $1.68 per burger d. Total cost = (4 million burgers × $.45) + $3.7 million = $5.5 million Average cost = $5.5 million / 4.0 million burgers = $1.38 per burger e. The fixed costs are spread across more burgers—thus the average cost falls. 3/21 4/14/2017 2. Assignment Print View Award: 1 out of 1.00 point A project currently generates sales of $1 million, variable costs equal 40% of sales, and fixed costs are $.2 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items. a. What are the effects on cash flow, if sales increase from $1 million to $1.1 million? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash flow increases by $ 42,000 b. What are the effects on cash flow, if variable costs increase to 55% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash flow decreases by $ 105,000 References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. A project currently generates sales of $1 million, variable costs equal 40% of sales, and fixed costs are $.2 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items. a. What are the effects on cash flow, if sales increase from $1 million to $1.1 million? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash flow increases by $ 42,000 ± 0.1% b. What are the effects on cash flow, if variable costs increase to 55% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.) 105,000 ± 0.1% Cash flow decreases by $ Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. Sales Variable costs Fixed costs Earnings before taxes Taxes Net income 40% 30% a. Sales Variable costs Fixed costs Base Case $ 1,000,000 400,000 200,000 $ 400,000 120,000 $ 280,000 $ 1,100,000 40% 440,000 200,000 4/21 4/14/2017 Assignment Print View Earnings before taxes Taxes Net income $ 30% $ 460,000 138,000 322,000 Cash flow increases by $42,000 b. Sales $ 1,000,000 Variable costs 55% 550,000 Fixed costs 200,000 Earnings before taxes $ 250,000 Taxes 30% 75,000 Net income $ 175,000 Cash flow decreases by $105,000 5/21 4/14/2017 3. Assignment Print View Award: 0 out of 1.00 point Finefodder’s analysts have come up with the following revised estimates for the Gravenstein store: Investment Sales Variable costs as % of sales Fixed cost Pessimistic $ 4,200,000 14,000,000 70 $ 2,600,000 Range Expected $ 4,080,000 18,000,000 69 $ 2,300,000 Optimistic $ 4,020,000 26,000,000 68 $ 2,100,000 Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straight­line 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.) Pessimistic Investment Sales Variable costs as % of sales Fixed cost $ 0 $ 6 $ 3 $ 5 NPV of Gravenstein Store Expected $ 2 $ 6 $ 5 $ 3 Optimistic $ 2 $ 5 $ 1 $ 5 References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. Finefodder’s analysts have come up with the following revised estimates for the Gravenstein store: Investment Sales Variable costs as % of sales Fixed cost Pessimistic $ 4,200,000 14,000,000 70 $ 2,600,000 Range Expected $ 4,080,000 18,000,000 69 $ 2,300,000 Optimistic $ 4,020,000 26,000,000 68 $ 2,100,000 Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straight­line 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.) Investment Sales Variable costs as % of sales Fixed cost $ $ $ $ Pessimistic 11,686,052 ± 0.01% 6,169,066 ± 0.01% 10,962,012 ± 0.01% 10,419,414 ± 0.01% NPV of Gravenstein Store Expected $ 11,775,908 ± 0.01% $ 11,775,908 ± 0.01% $ 11,775,908 ± 0.01% $ 11,775,908 ± 0.01% $ $ $ $ Optimistic 11,820,836 ± 0.01% 22,989,592 ± 0.01% 12,589,805 ± 0.01% 12,680,238 ± 0.01% Explanation: 6/21 4/14/2017 Assignment Print View Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. Sensitivity on investment amount: Sales Variable costs Fixed costs Depreciation Pretax profit Taxes Net income Cash flow from operations PV of cash flow from operations Less: Investment NPV Sensitivity on sales: Sales Variable costs Fixed costs Depreciation Pretax profit Taxes Net income Cash flow from operations PV of cash flow from operations Less: Investment NPV Sensitivity on variable costs: Sales Variable costs Fixed costs Depreciation Pretax profit Taxes Net income Cash flow from operations PV of cash flow from operations Less: Investment NPV Sensitivity on fixed costs: Sales Variable costs Fixed costs Depreciation Pretax profit Taxes Net income Cash flow from operations PV of cash flow from operations Less: Investment NPV Pessimistic Expected Optimistic $18,000,000 $18,000,000 $18,000,000 12,420,000 12,420,000 12,420,000 2,300,000 2,300,000 2,300,000 350,000 340,000 335,000 $ 2,930,000 $ 2,940,000 $ 2,945,000 1,172,000 1,176,000 1,178,000 $ 1,758,000 $ 1,764,000 $ 1,767,000 2,108,000 2,104,000 2,102,000 $15,886,052 $15,855,908 $15,840,836 4,200,000 4,080,000 4,020,000 $11,686,052 $11,775,908 $11,820,836 $14,000,000 $18,000,000 $26,000,000 9,660,000 12,420,000 17,940,000 2,300,000 2,300,000 2,300,000 340,000 340,000 340,000 $ 1,700,000 $ 2,940,000 $ 5,420,000 680,000 1,176,000 2,168,000 $ 1,020,000 $ 1,764,000 $ 3,252,000 $ 1,360,000 $ 2,104,000 $ 3,592,000 $10,249,066 $15,855,908 $27,069,592 4,080,000 4,080,000 4,080,000 $ 6,169,066 $11,775,908 $22,989,592 $18,000,000 $18,000,000 $18,000,000 12,600,000 12,420,000 12,240,000 2,300,000 2,300,000 2,300,000 340,000 340,000 340,000 $ 2,760,000 $ 2,940,000 $ 3,120,000 1,104,000 1,176,000 1,248,000 $ 1,656,000 $ 1,764,000 $ 1,872,000 $ 1,996,000 $ 2,104,000 $ 2,212,000 $15,042,012 $15,855,908 $16,669,805 4,080,000 4,080,000 4,080,000 $10,962,012 $11,775,908 $12,589,805 $18,000,000 $18,000,000 $18,000,000 12,420,000 12,420,000 12,420,000 2,600,000 2,300,000 2,100,000 340,000 340,000 340,000 $ 2,640,000 $ 2,940,000 $ 3,140,000 1,056,000 1,176,000 1,256,000 $ 1,584,000 $ 1,764,000 $ 1,884,000 $ 1,924,000 $ 2,104,000 $ 2,224,000 $14,499,414 $15,855,908 $16,760,238 4,080,000 4,080,000 4,080,000 $10,419,414 $11,775,908 $12,680,238 7/21 4/14/2017 Assignment Print View 4. Award: 0 out of 0.50 points The following estimates have been prepared for a project: Fixed costs: $36,000 Depreciation: $24,000 Sales price per unit: $4 Accounting break­even: 40,000 units What must be the variable cost per unit? (Round your answer to 2 decimal places.) $ 3.75 Variable cost per unit References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. The following estimates have been prepared for a project: Fixed costs: $36,000 Depreciation: $24,000 Sales price per unit: $4 Accounting break­even: 40,000 units What must be the variable cost per unit? (Round your answer to 2 decimal places.) Variable cost $ 2.50 ± 1% per unit Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. At the accounting break­even point the net profit will be zero. Profit = [40,000 × ($4 – Variable cost per unit)] – $36,000 – 24,000 = 0 Variable cost per unit = $2.50. 8/21 4/14/2017 5. Assignment Print View Award: 0 out of 1.00 point Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $120. The materials cost for a standard diamond is $60. The fixed costs incurred each year for factory upkeep and administrative expenses are $204,000. The machinery costs $1.5 million and is depreciated straight­line over 10 years to a salvage value of zero. a. What is the accounting break­even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.) 2,950 Break­even sales diamonds per year b. What is the NPV break­even level of diamonds sold per year assuming a tax rate of 40%, a 10­year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 2,100 Break­even sales diamonds per year References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $120. The materials cost for a standard diamond is $60. The fixed costs incurred each year for factory upkeep and administrative expenses are $204,000. The machinery costs $1.5 million and is depreciated straight­line over 10 years to a salvage value of zero. a. What is the accounting break­even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.) Break­even sales 5,900 ± .1% diamonds per year b. What is the NPV break­even level of diamonds sold per year assuming a tax rate of 40%, a 10­year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Break­even sales 8,514 ± .1% diamonds per year Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be 9/21 4/14/2017 Assignment Print View used for actual calculations. a. Accounting break­even = (Fixed costs + Depreciation) / (Sales price – Variable cost per unit) = [$204,000 + ($1.5 million / 10)] / ($120 – 60) = 5,900 units b. For the NPV to equal zero, the present value of the operating cash flows must equal the initial investment. $1.5 million = OCF (PVIFA 10%,10) OCF = $244,118.09 OCF = [(Revenue – Expenses) × (1 – Tax)] + (Depreciation × Tax rate) $244,118.09 = ({[Q × ($120 – 60)] – $204,000} × (1 – .40)) + [($1.5 million / 10) × .40] $244,118.09 = $36Q – $122,400 + 60,000 Q = 8,514 diamonds per year 10/21 4/14/2017 6. Assignment Print View Award: 1 out of 1.00 point You are evaluating a project that will require an investment of $16 million that will be depreciated over a period of 20 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break­even point? No b. Would it increase the NPV break­even point? Yes References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. You are evaluating a project that will require an investment of $16 million that will be depreciated over a period of 20 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break­even point? No b. Would it increase the NPV break­even point? Yes Explanation: a. The accounting break­even point would be unaffected since taxes paid are zero when pretax profit is zero, regardless of the tax rate. b. The NPV break­even point would increase since the after­tax cash flow corresponding to any level of sales falls when the tax rate increases. 11/21 4/14/2017 7. Assignment Print View Award: 0 out of 1.00 point Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $2,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 will be depreciated straight­line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break­even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Acounting break­even level of sales 32 units b. What is the NPV break­even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) NPV break­even level of sales 15 units c. What is the accounting break­even 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 break­even level of sales 18 units d. What is the NPV break­even 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 break­even level of sales 25 units References Worksheet Learning Objective: 10­ 02 Use sensitivity, scenario, and break­even analyses to see how project profitability would be affected by an error in your forecasts. Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $2,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 will be depreciated straight­line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break­even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Acounting break­even level of sales 145 ± 1% units b. What is the NPV break­even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) NPV break­even level of sales 151 ± 1% units c. What is the accounting break­even 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 break­even level of sales 145 ± 1% units d. What is the NPV break­even 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 break­even level of sales 156 ± 1% units 12/21 4/14/2017 Assignment Print View Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. a. Accounting break­even = (Fixed costs + Depreciation) / (Sales price – Variable cost per unit) = [$2,500 + ($2,000 / 5)] / ($50 – 30) = 145 units b. For the NPV to equal zero, the present value of the operating cash flows must equal the initial investment. $2,000 = OCF (PVIFA 10%, 5) OCF = $527.59 OCF = [(Revenue – Expenses) × (1 – Tax)] + (Depreciation × Tax rate) $527.59 = ({[Q × ($50 – 30)] – $2,500} × (1 – 0)) + [($2,000 / 5) × 0] $527.59 = $20Q – $2,500 + 0 Q = 151 units c. Accounting break­even = (Fixed costs + Depreciation) / (Sales price – Variable cost per unit) = [$2,500 + ($2,000 / 5)] / ($50 – 30) = 145 units d. For the NPV to equal zero, the present value of the operating cash flows must equal the initial investment. $2,000 = OCF (PVIFA 10%, 5) OCF = $527.59 OCF = [(Revenue – Expenses) × (1 – Tax)] + (Depreciation × Tax rate) $527.59 = ({[Q × ($50 – 30)] – $2,500} × (1 – .40)) + [($2,000 / 5) × .40] $527.59 = $12Q – 1,500 + 160 Q = 156 units 13/21 4/14/2017 8. Assignment Print View Award: 0 out of 1.00 point You estimate that your cattle farm will generate $.50 million of profits on sales of $10 million under normal economic conditions and that the degree of operating leverage is 4. (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 $7.5 million? Profit will increase to $ 55 million. b. What if they are $12.5 million? Profit will decrease to $ 23.0 million. References Worksheet Learning Objective: 10­ 03 Understand why an overestimate of sales is more serious for projects with high operating leverage. You estimate that your cattle farm will generate $.50 million of profits on sales of $10 million under normal economic conditions and that the degree of operating leverage is 4. (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 $7.5 million? Profit will decrease to $ 0 million. b. What if they are $12.5 million? Profit will increase to $ 1.0 ± 1% million. Explanation...
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