Business Finance Answers_Part_52

Business Finance Answers_Part_52 - CHAPTER 11 B-205 6 We...

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CHAPTER 11 B-205 6. We will use the tax shield approach to calculate the OCF for the best- and worst-case scenarios. For the best-case scenario, the price and quantity increase by 10 percent, so we will multiply the base case numbers by 1.1, a 10 percent increase. The variable and fixed costs both decrease by 10 percent, so we will multiply the base case numbers by .9, a 10 percent decrease. Doing so, we get: OCF best = {[($43)(1.1) – ($29)(0.9)](90,000)(1.1) – $780,000(0.9)}(0.65) + 0.35($90,500) OCF best = $939,595 The best-case NPV is: NPV best = –$724,000 + $939,595(PVIFA 15%,8 ) NPV best = $3,492,264.85 For the worst-case scenario, the price and quantity decrease by 10 percent, so we will multiply the base case numbers by .9, a 10 percent decrease. The variable and fixed costs both increase by 10 percent, so we will multiply the base case numbers by 1.1, a 10 percent increase. Doing so, we get: OCF worst = {[($43)(0.9) – ($29)(1.1)](90,000)(0.9) – $780,000(1.1)}(0.65) + 0.35($90,500) OCF worst = –$168,005 The worst-case NPV is: NPV worst = –$724,000 – $168,005(PVIFA 15%,8 ) NPV worst = –$1,477,892.45 7. The cash breakeven equation is: Q C = FC/(P – v) And the accounting breakeven equation is: Q A = (FC + D)/(P – v)
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