Fundamentals of Corporate Finance, 2 Semester Access, FIN 3043
11th Edition
ISBN: 9781259721816
Author: 11e Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 11, Problem 14QP
Cash Flow and Leverage [LO4] At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.42. The operating cash flow is $64,000 in this case. Ignoring the effect of taxes, what are fixed costs? What will the operating cash flow be if output rises to 18,500 units? If output falls to 16,500 units?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
6b)
Kalvino Inc. has a new five-year project that produces high-end raincoats. The initial investment equals $85,000. The estimated selling price equals $102 per unit and variable costs equal $80 per unit. Fixed costs equal $29,000. Investors do require a 15% return.
Calculate the cash break-even quantity? Interpret your answer.
Calculate the accounting break-even quantity? Interpret your answer.
Calculate the financial break-even quantity? Interpret your answer.
What is the degree of operating leverage for this project? Assuming that sales are estimated at $249,900.
use excel/show all excel formulas answering the following
LO3 20. Sensitivity Analysis We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. b. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.
LO3 21. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to…
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?
Chapter 11 Solutions
Fundamentals of Corporate Finance, 2 Semester Access, FIN 3043
Ch. 11.1 - Prob. 11.1ACQCh. 11.1 - What are some potential sources of value in a new...Ch. 11.2 - Prob. 11.2ACQCh. 11.2 - What are the drawbacks to the various types of...Ch. 11.3 - How are fixed costs similar to sunk costs?Ch. 11.3 - What is net income at the accounting break-even...Ch. 11.3 - Why might a financial manager be interested in the...Ch. 11.4 - If a project breaks even on an accounting basis,...Ch. 11.4 - If a project breaks even on a cash basis, what is...Ch. 11.4 - Prob. 11.4CCQ
Ch. 11.5 - What is operating leverage?Ch. 11.5 - How is operating leverage measured?Ch. 11.5 - Prob. 11.5CCQCh. 11.6 - What is capital rationing? What types are there?Ch. 11.6 - Prob. 11.6BCQCh. 11 - Prob. 11.1CTFCh. 11 - Marcos Entertainment expects to sell 84,000...Ch. 11 - Delta Tool has projected sales of 8,500 units at a...Ch. 11 - What is true for a project if that project is...Ch. 11 - A capital-intensive project is one that has a...Ch. 11 - Pavloki, Inc., has three proposed projects with...Ch. 11 - Forecasting Risk [LO1] What is forecasting risk?...Ch. 11 - Sensitivity Analysis and Scenario Analysis [LO1,...Ch. 11 - Prob. 3CRCTCh. 11 - Operating Leverage [LO4] At one time at least,...Ch. 11 - Operating Leverage [LO4] Airlines offer an example...Ch. 11 - Prob. 6CRCTCh. 11 - Prob. 7CRCTCh. 11 - Prob. 8CRCTCh. 11 - Prob. 9CRCTCh. 11 - Scenario Analysis [LO2] You are at work when a...Ch. 11 - Calculating Costs and Break-Even [LO3] Night...Ch. 11 - Prob. 2QPCh. 11 - Scenario Analysis [LO2] Sloan Transmissions, Inc.,...Ch. 11 - Sensitivity Analysis [LO1] For the company in the...Ch. 11 - Sensitivity Analysis and Break-Even [LO1, 3] We...Ch. 11 - Prob. 6QPCh. 11 - Prob. 7QPCh. 11 - Calculating Break-Even [LO3] In each of the...Ch. 11 - Calculating Break-Even [LO3] A project has the...Ch. 11 - Using Break-Even Analysis [LO3] Consider a project...Ch. 11 - Calculating Operating Leverage [LO4] At an output...Ch. 11 - Leverage [LO4] In the previous problem, suppose...Ch. 11 - Operating Cash Flow and Leverage [LO4] A proposed...Ch. 11 - Cash Flow and Leverage [LO4] At an output level of...Ch. 11 - Prob. 15QPCh. 11 - Prob. 16QPCh. 11 - Sensitivity Analysis [LO1] Consider a four-year...Ch. 11 - Operating Leverage [LO4] In the previous problem,...Ch. 11 - Project Analysis [LO1, 2, 3, 4] You are...Ch. 11 - Project Analysis [LO1, 2] McGilla Golf has decided...Ch. 11 - Prob. 21QPCh. 11 - Sensitivity Analysis [LO1] McGilla Golf would like...Ch. 11 - Break-Even Analysis [LO3] Hybrid cars are touted...Ch. 11 - Break-Even Analysis [LO3] In an effort to capture...Ch. 11 - Prob. 25QPCh. 11 - Operating Leverage and Taxes [LO4] Show that if we...Ch. 11 - Scenario Analysis [LO2] Consider a project to...Ch. 11 - Sensitivity Analysis [LO1] In Problem 27, suppose...Ch. 11 - Prob. 29QPCh. 11 - Prob. 30QP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Assume you are considering a USD 100,000 investment for which the future cash flows depend on the state of the economy. What are the expected cash flow and rate of return of the investment considering the three probability of the state of the economy? State of the economy Probability of the states CF from the investment % returns (CF / Investment cost) Economic recession 50% USD 10,000 10% (10,000 / 100,000) Moderate economic recession 40% USD 12,000 12% (12,000 / 100,000) Strong economic recession 10% USD 14,000…arrow_forwardA3 8av You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (v) Internal Rate of Return (IRR in %)arrow_forward7.3 q4- A project will incur $600 in shutdown costs the year after the completion of the project. The tax rate is 30%. What is the value of the after-tax shutdown costs (where a negative number is a net cash outflow and a positive number is an incremental cash inflow)? a. $420 b. $380 c. $-420 d. $-380arrow_forward
- Operating Leverage. You estimate that your cattle farm will generate $1 million of profits on sales of $4 million under normal economic conditions and that the degree of operating leverage is 8. What will profits be if sales turn out to be $3.5 million? What if they are $4.5 million? (LO3)arrow_forwardP12–28 CAPITAL RATIONING: NPV APPROACH A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million. Calculate the present value of cash inflows associated with each project. Select the optimal group of projects, keeping in mind that unused funds are costly.arrow_forward(6.1) A firm is considering a new project. If the project goes ahead, it will require the use of an existing warehouse owned by the company. If the project does not go ahead, the warehouse could be immediately rented out for $5000 per month. In relation to the use of the warehouse, what is the incremental free cash flow (i.e. how many dollars is the firm better or worse off) from proceeding with the project? a. $5000 per month b. $60000 per year c. -$5000 per month d. $0 per month Clear my choicearrow_forward
- CH5 #10 A company is considering two alternative marketing strategies for a new product. Introducing the product will require an outlay of $15,000. With a low price, the product will generate cash proceeds of $10,000 per year and will have a life of two years. With a high price, the product will generate cash proceeds of $18,000 but will have a life of only one year. The hurdle rate for this project is 0.05. Which marketing strategy should be accepted?arrow_forward11 If sales increase from P80,000 per year to P140,000 per year, and if the operating leverage factor is 5, then net operating income should increase by: Group of answer choices 375% 167% 334% 250% 150% 875% 188%arrow_forwardA3 8aii You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (ii) Profitability Index (PI)arrow_forward
- 5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? a. The company has spent and expensed $1 million on R&D associated with the new project b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year c. The new project is expected to reduce sales of one of the company's existing products by 5%arrow_forward[6:46 am, 15/01/2022] Mahmoud: 19. Cost of Capital. Pollution Busters, Inc., is considering a purchase of 10 additional carbon sequesters for $100,000 apiece. The sequesters last for only 1 year until saturated with carbon. Then the carbon is removed and sold. (O LO4) a. Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is guaranteed to be $115,000. How would you determine the opportunity cost of capital for this investment? b. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters' CFO learns that average rates of return from investment on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case? Is the purchase of an additional sequester a worthwhile capital investment if she expects that the price of extracted carbon will $115,000? please show the strpsarrow_forwardA3 8aiv You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (iv) Discounted payback period (in years)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY