Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 10, Problem 16PS
Summary Introduction
To calculate: The degree of operating leverage (DOL).
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A project has fixed costs of $400 per year, depreciation charges of $400 a year, annual revenue of $3,600, and variable costs equal to two-thirds of revenues.
a. If sales increase by 17%, what will be the percentage increase in pretax profits? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. What is the degree of operating leverage of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A proposed project has fixed costs of $41,000 per year. The operating cash flow at 10,000 units is $67,000. a. Ignoring the effect of taxes, what is the degree of operating leverage? b. If units sold rise from 10,000 to 10,100, what will be the increase in operating cash flow? c.What is the new degree of operating leverage?
A proposed project has fixed costs of $88,000 per year. The operating cash flow at 11,300 units is $116,500. Ignore the effect of taxes. What is the degree of operating leverage?
Chapter 10 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10 - Capital budgeting process True or false? a. The...Ch. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Prob. 5PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 7PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PSCh. 10 - Break-even analysis Break-even calculations are...
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- 7). A project has the following estimated data: Price = $54 per unit Variable costs = $36 per unit Fixed costs = $19,300 Required return = 12% Initial investment = $23,800 Life = 4 years Ignoring the effect of taxes, what is the: a). Accounting break-even quantity? b) Cash break-even quantity? c) Financial break-even quantity? d) Degree of operating leverage at the financial break-even level of output?arrow_forwardA proposed project has fixed costs of $108,000 per year. The operating cash flow at 6,800 units is $96,600. Ignore the effect of taxes. a. What is the degree of operating leverage? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) b. If units sold rise from 6,800 to 7,300, what will be the new operating cash flow? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. If units sold rise from 6,800 to 7,300, what is the new degree of operating leverage? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)arrow_forwardA firm made the following estimates for a project: price per unit = $18, variable cost per unit = $7, fixed cost = $60, and quantity = 25 units. The firm thinks that the actual value of each variable could be as much as 20% higher or lower. Find the operating cash flow in the best-case scenario if depreciation is $120 and the tax rate is 35%.arrow_forward
- An investment has an installed cost of $565,382. The cash flows over the four-year life of the investment are projected to be $194,584, $238,318, $186,674, and $154,313. If the discount rate is zero, what is the NPV? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. If the discount rate is infinite, what is the NPV? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. At what discount rate is the NPV just equal to zero? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.arrow_forwardA firm made the following estimates for a project: price per unit = $18, variable cost per unit = $7, fixed cost = $60, and quantity = 25 units. The firm thinks that the actual value of each variable could be as much as 20% higher or lower. Find the operating cash flow in the best-case scenario if depreciation is $120 and the tax rate is 35%. a.)121 b.)323 c.)404 d.)216 e.)73 f.)182arrow_forwardA company is considering a project which would involve purchasing amachine for $20,000 which will have no value at the end of the project.It will be used to produce a product which will have sales of 600 unitsper year for 4 years. The sales price per unit will be $50, the variablecosts per unit $20 and the incremental fixed costs of the project will be$10,000 per annum. These are all expressed in real terms and will besubject to inflation.Sales will inflate at 5% per annum, variable costs at 6% per annumand fixed costs at 7% per annum.The cost of capital is 15%Required:-Calculate NPV of the projectarrow_forward
- You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900. The depreciation is $8,300 a year and the tax rate is 35 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?arrow_forwardAn investment has an installed cost of $787,350. The cash flows over the four-year life of the investment are projected to be $312,615, $304,172, $245,367, and $229,431. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculationsarrow_forwardNet Present Value The investment in project A is $1 million, and the investment in project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? For any discount rate from zero percent to 20 percent, project B has an NPV twice as great as that of project A . Explain your answerarrow_forward
- The X Division of NUBD Products Co. is considering an investment in a new project. The project has an estimated cost of P1,000,000. If NUBD Products Co. has a target rate of return of 12%, how large does the return on investment on this project need to be to generate P180,000 of residual income?arrow_forwardA proposed project has fixed costs of $48,000 per year. The operating cash flow at 11,000 units is $85,000 units. What is the new degree of operating leverage?arrow_forwardHuang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome NPV Recession 0.05 ($64 million) Below average 0.20 (10 million) Average 0.50 12 million Above average 0.20 16 million Boom 0.05 30 million Calculate the project's expected NPV, standaarrow_forward
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