Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

# Note that the variable costs of the expensive clubs

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Unformatted text preview: ,400,000 + \$6,354,000(PVIFA14%,7) + \$1,400,000/1.147 NPV = \$7,507,381.20 And the IRR is: IRR = –\$18,900,000 – 1,400,000 + \$6354,000(PVIFAIRR%,7) + \$1,400,000/(1 + IRR)7 IRR = 25.15% 15. The upper and lower bounds for the variables are: Unit sales (new) Price (new) VC (new) Fixed costs Sales lost (expensive) Sales gained (cheap) Base Case 55,000 \$750 \$390 \$8,100,000 12,000 15,000 Best Case 60,500 \$825 \$351 \$7,290,000 10,800 16,500 Worst Case 49,500 \$675 \$429 \$8,910,000 13,200 13,500 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: Sales New clubs Exp. clubs Cheap clubs \$825 × 60,500 = \$49,912,500 \$1,100 × (–10,800) = – 11,880,000 \$400 × 16,500 = 6,600,000 \$44,632,500 For the variable costs, we must include the units gained or lost from the existing clubs. Note that the variable costs of the expensive clubs are an inflow. If we are not producing the sets any more, we will save these variable costs, which is an inflow. So: Var. costs New clubs Exp. clubs Cheap clubs –\$351 × 60,500 = –\$21,235,500 –\$620 × (–10,800) = 6,696,000 –\$210 × 16,500 = –3,465,000 –\$18,004,500 198 The pro forma income statement will be: Sales Variable costs Fixed costs Depreciation EBT Taxes Net income \$44,632,500 18,004,500 7,290,000 2,700,000 \$16,638,000 6,655,200 \$9,982,800 Using the bottom up OCF calculation, we get: OCF = Net income + Depreciation = \$9,982,800 + 2,700,000 OCF = \$12,682,800 And the best-case NPV is: NPV = –\$18,900,000 – 1,400,000 + \$12,682,800(PVIFA14%,7) + 1,400,000/1.147 NPV = \$34,647,204.86 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: Sales New clubs Exp. clubs Cheap clubs \$675 × 49,500 = \$33,412,500 \$1,100 × (– 13,200) = – 14,520,000 \$400 × 13,500 = 5,400,000 \$24,292,500 For the variable costs, we must include the units gained or lost from the existing clubs. Note that the variable costs of the expensive clubs are an inflow. If we are not producing the sets any more, we will save these variable costs, which is an inflow. So: Var. costs New clubs Exp. clubs Cheap clubs –\$429 × 49,500 = –\$21,235,500 –\$620 × (– 13,200) = 8,184,000 –\$210 × 13,500 = –2,835,000 –\$15,886,500 199 The pro forma income statement will be: Sales Variable costs Costs Depreciation EBT Taxes Net income \$24,292,500 15,886,500 8,910,000 2,700,000 –\$3,204,000 –1,281,600 –\$1,922,400 *assumes a tax credit Using the bottom up OCF calculation, we get: OCF = NI + Depreciation = –\$1,922,400 + 2,700,000 OCF = \$777,600 And the worst-case NPV is: NPV = –\$18,900,000 – 1,400,000 + \$777,600(PVIFA14%,7) + 1,400,000/1.147 NPV = –\$16,405,921.91 16. To calculate the sensitivity of the NPV to changes in the price of the new club, we simply need to change the price of the new club. We will choose \$760, but the choice is irrelevant as the sensitivity will be the same no matter what price we choose. 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: Sales New clubs Exp. clubs Cheap clubs \$760 × 55,000 = \$41,800,000 \$1,100 × (– 12,000) = –13,200,000 \$400 × 15,000 = 6,000,000 \$34,600,000 For the variable costs, we must include the units gained or lost from the existing clubs. Note that the variable costs of the expensive clubs are an inflow. If we are not producing the sets any more, we will save these variable costs, which is an inflow. So: Var. costs New clubs Exp. clubs Cheap clubs –\$390 × 55,000 = –\$21,450,000 –\$620 × (–12,000) = 7,440,000 –\$210 × 15,000 = –3,150,000 –\$17,160,000 200 The pro forma income statement will be: Sales Variable costs Fixed costs Depreciation EBT Taxes Net income \$34,600,000 17,160,000 8,100,000 2,700,000 \$6,640,000 2,656,000 \$3,984,000 Using the bottom up OCF calculation, we get: OCF = NI + Depreciation = \$3,984,000 + 2,700,000 OCF = \$6,684,000 And the NPV is: NPV = –\$18,900,000 – 1,400,000 + \$6,684,000(PVIFA14%,7) + 1,400,000/1.147 NPV = \$8,922,521.80 So, the sensitivity of the NPV to changes in the price of the new club is: ∆ NPV/∆ P = (\$7,507,381.20 – 8,922,521.80)/(\$750 – 760) NPV/∆ P = \$141,514.06 For every dollar increase (decrease) in the price of the clubs, the NPV increases (decreases) by \$141,514.06. To calculate the sensitivity of the NPV to changes in the quantity sold of the new club, we simply need to change the quantity sold. We will choose 60,000 units, but the choice is irrelevant as the sensitivity will be the same no matter what quantity we choose. We will calculate the sales and variable costs...
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## This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of Texas-Tyler.

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