Prepare a 2 and 1/2 page paper using APA format discussing how the Coase Theorem
provides an alternative to government regulation and provision of services. How is the
definition of private property a critical part of this analysis.
Your paper should refl
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 + Deprecia
So, the payback period is:
Payback period = 3 + $1,238,000/$6,345,000
Payback period = 3.195 years
The NPV is:
NPV = $18,900,000 1,400,000 + $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,
c.
The accounting breakeven is:
QA = (FC + D)/(P v)
QA = [$830,000 + ($960,000/4)]/($25,000 19,500)
QA = 194.55 or about 195 units
14. The marketing study and the research and development are both sunk costs and should be ignored.
We will calculate the sa
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 + D
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
b.
We would abandon the project if the cash flow from selling the equipment is greater than the
present value of the future cash flows. We need to find the sale quantity where the two are
equal, so:
$1,300,000 = ($50)Q(PVIFA16%,9)
Q = $1,300,000/[$50(4.60
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.
This is the expected value for the studio, but the screenwriter will only receive one percent of this
amount, so the payment to the screenwriter will be:
Payment to screenwriter = $600,000 .01
Payment to screenwriter = $6,000
The screenwriter should take
Using the tax shield approach, the OCF and NPV for the base case estimate are:
OCFbase = [($25,000 19,500)(240) $830,000](0.65) + 0.35($960,000/4)
OCFbase = $402,500
NPVbase = $960,000 + $402,500(PVIFA15%,4)
NPVbase = $189,128.79
The OCF and NPV for the w
Now we can calculate the financial breakeven point. The financial breakeven point for this project is:
QF = [EAC + FC(1 tC) Depreciation(tC)] / [(P VC)(1 tC)]
QF = [$97,678.02 + $185,000(1 0.34) $78,000(0.34)] / [($60 14) (1 0.34)]
QF = 6,365.55 or about
9.
a.
The accounting breakeven is the aftertax sum of the fixed costs and depreciation charge divided
by the aftertax contribution margin (selling price minus variable cost). So, the accounting
breakeven level of sales is:
QA = [(FC + Depreciation)(1 tC)]
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Lesson 5 Homework
Chapter 9 Question 1
The future value represents the value of a sum sometime in the future. The present value
represents the current value of a sum.
Chapter 9 Question 6
The number of terms represents the number of times a ye
Next, we need to account for the changes in inventory each year. The inventory is a percentage of
sales. The way we will calculate the change in inventory is the beginning of period inventory minus
the end of period inventory. The sign of this calculation
10. When the additional analysis has a negative NPV. Since the additional analysis is likely to occur
almost immediately, this means when the benefits of the additional analysis outweigh the costs. The
benefits of the additional analysis are the reduction
The worst-case NPV is:
NPVworst = $724,000 $146,100(PVIFA15%,8)
NPVworst = $1,379,597.67
3.
We can use the accounting breakeven equation:
QA = (FC + D)/(P v)
to solve for the unknown variable in each case. Doing so, we find:
(1): QA = 110,500 = ($820,000
So, the change in NPV for every unit change in sales is:
NPV/S = ($439,001.55 672,342.27)/(75,000 80,000)
NPV/S = +$46.668
If sales were to drop by 500 units, then NPV would drop by:
NPV drop = $46.668(500) = $23,334.07
You may wonder why we chose 80,000
CHAPTER 7
RISK ANALYSIS, REAL OPTIONS, AND
CAPITAL BUDGETING
Answers to Concepts Review and Critical Thinking Questions
1.
Forecasting risk is the risk that a poor decision is made because of errors in projected cash flows.
The danger is greatest with a n
We should not necessarily purchase the machine today. We would want to purchase the machine
when the NPV is the highest. So, we need to calculate the NPV each year. The NPV each year will be
the cost plus the present value of the increased cash savings. W
The NPV of the focus group is:
NPV = C0 + CSuccess (Prob. of Success)
NPV = $135,000 + $1,500,000 (0.65)
NPV = $840,000
And the NPV of using the consulting firm is:
NPV = C0 + CSuccess (Prob. of Success)
NPV = $400,000 + $1,500,000 (0.85)
NPV = $875,000
T
19. If the project is a success, present value of the future cash flows will be:
PV future CFs = $50(22,000)(PVIFA16%,9)
PV future CFs = $5,067,198.26
If the sales are only 4,000 units, from Problem #17, we know we will abandon the project, with a
value o
Note, this calculation solves for the annuity payment with the initial investment as the present
value of the annuity, in other words:
PVA = C(cfw_1 [1/(1 + R)]t / R)
$12,000 = Ccfw_[1 (1/1.12)3 ] / .12
C = $4,996.19
Now we can calculate the financial br
23. a.
The NPV of the project is sum of the present value of the cash flows generated by the project.
The cash flows from this project are an annuity, so the NPV is:
NPV = $84,000,000 + $22,000,000(PVIFA19%,10)
NPV = $11,456,567.07
b.
The company should a
6.
Here we are finding the YTM of an annual coupon bond. The fact that the bond is denominated in
yen is irrelevant. The bond price equation is:
P = 87,000 = 5,400(PVIFAR%,21) + 100,000(PVIFR%,21)
Since we cannot solve the equation directly for R, using a
Also, notice that the price of each bond when no time is left to maturity is the par value, even though
the purchaser would receive the par value plus the coupon payment immediately. This is because we
calculate the clean price of the bond.
14. Any bond t
11. The coupon rate, located in the first column of the quote is 6.125%. The bid price is:
Bid price = 119:19 = 119 19/32 = 119.59375% $1,000 = $1,195.9375
The previous days ask price is found by:
Previous days asked price = Todays asked price Change = 11
The percentage change in price is calculated as:
Percentage change in price = (New price Original price) / Original price
PFaulk% = ($696.82 783.24) / $783.24 = 0.1103 or 11.03%
PGonas% = ($1,101.06 1,216.76) / $1,216.76 = 0.0951 or 9.51%
If the YTM decli
Using a spreadsheet, financial calculator, or trial and error we find:
R = 4.650%
This is the semiannual interest rate, so the YTM is:
YTM = 2 4.650% = 9.30%
18. Accrued interest is the coupon payment for the period times the fraction of the period that h
21. The bond has 10 years to maturity, so the bond price equation is:
P = $871.55 = $41.25(PVIFAR%,20) + $1,000(PVIFR%,20)
Using a spreadsheet, financial calculator, or trial and error we find:
R = 5.171%
This is the semiannual interest rate, so the YTM i
Now, to find the weekly interest rate, we need to find the APR. Using the equation for discrete
compounding:
EAR = [1 + (APR / m)]m 1
We can solve for the APR. Doing so, we get:
APR = m[(1 + EAR)1/m 1]
APR = 52[(1 + .0696)1/52 1]
APR = .0673 or 6.73%
So,