Business Finance Answers_Part_56

Business Finance Answers_Part_56 - CHAPTER 11 B-221...

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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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Business Finance Answers_Part_56 - CHAPTER 11 B-221...

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