chap008 - Chapter 8: Strategy and Analysis in Using Net...

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Unformatted text preview: Chapter 8: Strategy and Analysis in Using Net Present Value 8.1 Go directly: NPV = 0.5 $20 million + 0.5 $5 million = $12.5 million Test marketing: NPV = -$2 million + (0.75 $20 million + 0.25 $5 million) / 1.15 = $12.13 million Go directly to the market. Focus group: -$120,000 + 0.70 $1,200,000 = $720,000 Consulting firm: -$400,000 + 0.90 $1,200,000 = $680,000 Direct marketing: 0.50 $1,200,000 = $600,000 The manager should conduct a focus group. Price more aggressively: -$1,300,000 + (0.55 0) + 0.45 (-$550,000) = -$1,547,500 Hire lobbyist: -$800,000 + (0.75 0) + 0.25 (-$2,000,000) = -$1,300,000 Tandem should hire the lobbyist. Let sales price be x. Depreciation = $600,000 / 5 = $120,000 BEP: ($900,000 + $120,000) / (x - $15) = 20,000 x = $66 The accounting break-even = (120,000 + 20,000) / (1,500 - 1,100) = 350 units a. b. The accounting break-even = 340,000 / (2.00 - 0.72) = 265,625 abalones [($2.00 300,000) - (340,000 + 0.72 300,000)] (0.65) = $28,600 This is the after tax profit. 7 8.2 8.3 8.4 8.5 8.6 8.7 EAC = $140,000 / 0.15 = $33,650 Depreciation = $140,000 / 7 = $20,000 BEP = {$33,650 + $340,000 0.65 - $20,000 0.35} / {($2 - $0.72) 0.65} = 297,656.25 297,657 units Answers to End-of-Chapter Problems B-91 8.8 Depreciation = $200,000 / 5 = $40,000 5 EAC = $200,000 / 0.12 = $200,000 / 3.60478 = $55,482 BEP = {$55,482 + $350,000 0.75 - $40,000 0.25} / {($25 - $5) 0.75} = 20,532.13 20533 units Let I be the break-even purchase price. Incremental C0 Sale of the old machine $20,000 Tax effect 3,400 Total $23,400 Depreciation per period = $45,000 / 15 = $3,000 Book value of the machine = $45,000 - 5 $3,000 = $30,000 Loss on sale of machine = $30,000 - $20,000 = $10,000 Tax credit due to loss = $10,000 0.34 = $3,400 Incremental cost savings: $10,000 (1 - 0.34) = $6,600 Incremental depreciation tax shield: [I / 10 - $3,000] (0.34) The break-even purchase price is the Investment (I), which makes the NPV be zero. NPV = 0 10 = -I + $23,400 + $6,600 0.15 + [I / 10 - $3,000] (0.34) 0.15 = -I + $23,400 + $6,600 (5.0188) + I (0.034) (5.0188) - $3,000 (0.34) (5.0188) I = $61,981 10 8.9 8.10 Pessimistic: NPV Expected: NPV = -$420,000 + = $247,814.17 = -$420,000 + = -$123,021.71 7 { 23,000( $38 - $21) - $320,000} 0.65+ $60,000 0.35 1.13t t =1 { 7 t =1 25,000( $40 - $20) - $300,000} 0.65+ $60,000 0.35 1.13t B-92 Answers to End-of-Chapter Problems Optimistic: NPV = -$420,000 + { 7 t =1 27,000( $42 - $19) - $280,000} 0.65+ $60,000 0.35 1.13t = $653,146.42 Even though the NPV of pessimistic case is negative, if we change one input while all others are assumed to meet their expectation, we have all positive NPVs like the one before. Thus, this project is quite profitable. Pessimistic Unit sales Price Variable costs Fixed costs 8.11 Pessimistic: NPV = -$1,500,000 + t =1 5 23,000 $38 $21 $320,000 NPV $132,826.30 $104,079.33 $175,946.75 $190,320.24 { 110,000 0.22( $115 - $72) - $850,000} 0.60 + $300,000 0.40 113 t . = -$675,701.68 Expected: NPV = -$1,500,000 + 5 t =1 { 120,000 0.25( $120 - $70) - $800,000} 0.60 + $300,000 0.40 113 t . = $399,304.88 Optimistic: NPV = -$1,500,000 + { 5 t =1 130,000 0.27( $125- $68) - $750,000} 0.60 + $300,000 0.40 1.13t = $1,561,468.43 The expected present value of the new tennis racket is $428,357.21. (Assuming there are equal chances of the 3 scenarios occurring.) 8.12 NPV = -1,500,000 + 5 t =1 { 130,000 0.22( $120 - $70) - $800,000} 0.60+ $300,000 0.40 1.13t = $251,581.17 The 3% drop in market share hurt significantly more than the 10,000 increase in market size helped. However, if the drop were only 2%, the effects would be about even. Market size is going up by over 8%, thus it seems market share is more important than market size. Answers to End-of-Chapter Problems B-93 8.13 a. b. 10 NPV = -$10,000,000 + ( $750, 000 .10 ) = -$5,391,574.67 Revised NPV 9 = -$10,000,000 + $750,000 / 1.10 + [(.5 $1,500,000 .10 ) + (.5 $200,000 )] / 1.10 = -$5,300,665.58 Option value of abandonment = -$5,300,665.58 ( -$5,391,574.67 ) = $90,909.09 10 NPV = -$100M + ( $100 2M .20 ) = $738.49Million 8.14 a. b. $50M = C .20 C = $12.40 Million (or 1.24 Million units ) 9 B-94 Answers to End-of-Chapter Problems ...
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This note was uploaded on 05/07/2010 for the course FIN 302 taught by Professor Corporationfinance during the Spring '10 term at Uni Potsdam.

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