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Unformatted text preview: CHAPTER 11 B-221 Dividing both sides by the initial OCF we get: (OCF 1 – OCF )/OCF = (P – v)( 1– t C )(Q 1 – Q ) / OCF Rearranging we get: [(OCF 1 – OCF )/OCF ][(Q 1 – Q )/Q ] = [(P – v)(1 – t C )Q ]/OCF = [OCF 0 – t C D + FC(1 – t)]/OCF DOL = 1 + [FC(1 – t) – t C D]/OCF 27. a . Using the tax shield approach, the OCF is: OCF = [(\$230 – 185)(35,000) – \$450,000](0.62) + 0.38(\$3,200,000/5) OCF = \$940,700 And the NPV is: NPV = –\$3,200,000 – 360,000 + \$940,700(PVIFA 13%,5 ) + [\$360,000 + \$500,000(1 – .38)]/1.13 5 NPV = \$112,308.60 b . In the worst-case, the OCF is: OCF worst = {[(\$230)(0.9) – 185](35,000) – \$450,000}(0.62) + 0.38(\$3,680,000/5) OCF worst = \$478,080 And the worst-case NPV is: NPV worst = –\$3,680,000 – \$360,000(1.05) + \$478,080(PVIFA 13%,5 ) + [\$360,000(1.05) + \$500,000(0.85)(1 – .38)]/1.13 5 NPV worst = –\$2,028,301.58 The best-case OCF is: OCF best = {[\$230(1.1) – 185](35,000) – \$450,000}(0.62) + 0.38(\$2,720,000/5) OCF best = \$1,403,320 And the best-case NPV is: NPV best = – \$2,720,000 – \$360,000(0.95) + \$1,403,320(PVIFA 13%,5 ) + [\$360,000(0.95) + \$500,000(1.15)(1 – .38)]/1.13 5 NPV best = \$2,252,918.79 28. To calculate the sensitivity to changes in quantity sold, we will choose a quantity of 36,000. The OCF at this level of sale is: OCF = [(\$230 – 185)(36,000) – \$450,000](0.62) + 0.38(\$3,200,000/5) OCF = \$968,600 B-222...
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