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CHAPTER 11
B209
The percentage change in OCF is:
%
OCF = 2.35(.10)
%
Δ
OCF = .2350 or 23.50%
So, the operating cash flow at this level of sales will be:
OCF = $43,000(1.235)
OCF = $53,105
If the output falls to 9,000 units, the percentage change in quantity sold is:
%
Q = (9,000 – 10,000)/10,000
%
Δ
Q = –.10 or –10.00%
The percentage change in OCF is:
%
OCF = 2.35(–.10)
%
Δ
OCF = –.2350 or –23.50%
So, the operating cash flow at this level of sales will be:
OCF = $43,000(1 – .235)
OCF = $32,897
15.
Using the equation for DOL, we get:
DOL = 1 + FC/OCF
At 11,000 units
DOL = 1 + $58,050/$53,105
DOL = 2.0931
At 9,000 units
DOL = 1 + $58,050/$32,895
DOL = 2.7647
Intermediate
16.
a
.
At the accounting breakeven, the IRR is zero percent since the project recovers the initial
investment. The payback period is N years, the length of the project since the initial investment is
exactly recovered over the project life. The NPV at the accounting breakeven is:
NPV = I [(1/N)(PVIFA
R%,N
) – 1]
b
.
At the cash breakeven level, the IRR is –100 percent, the payback period is negative, and the NPV
is negative and equal to the initial cash outlay.
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SOLUTIONS
c
.
The definition of the financial breakeven is where the NPV of the project is zero. If this is true,
then the IRR of the project is equal to the required return. It is impossible to state the payback
period, except to say that the payback period must be less than the length of the project. Since the
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This document was uploaded on 10/31/2011 for the course FIN 3403 at University of Florida.
 Spring '06
 Tapley
 Finance

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