a)
To determine:
Introduction:
Accounting break-even point refers to a point where the company faces zero profits.
b)
To determine: Internal rate of return, payback period, net present value at the point of cash break-even level of output.
Introduction:
Cash break-even point occurs when minimum revenue from sales is required to fetch the business with positive cash flows.
c)
To determine: Internal rate of return, payback period, net present value at the point of financial break-even level of output.
Introduction:
Financial break-even point refers to the point of earnings before interest and taxes (EBIT), which is equal to the fixed financial cost inclusive of preference dividend and interest.
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- Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.arrow_forward1. A plant operation is scheduled to be developed for a time zero capital cost of $400 million with year 1 through 10 revenues of $200 million per year less operating cost of $100 million per year with zero salvage value. Assume a washout of escalation of operating cost and revenue each year. "Washout" means any operating cost escalation is offset by the same dollar escalation of revenue so profit remains uniform at the today's dollar value profit. Evaluate the project ROR and analyze the sensitivity of the result to changing project life to 5 years or 15 years Evaluate the sensitivity of the project ROR to changing the time zero capital cost to $300 million and $500 million for the 10-year project life. Evaluate the sensitivity of the project ROR to changing the revenue to $250 million and $150 million for the 10-year project life. Plot the results in a Tornado chart.arrow_forwardModified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $325,000 Year 2 –100,000 Year 3 475,000 Year 4 475,000 Q1. Grey Fox Aviation Company’s WACC is 9%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 33.79% 29.18% -11.55% 27.65% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should Q2. ______ this…arrow_forward
- Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 –125,000 Year 3 450,000 Year 4 450,000 Green Caterpillar Garden Supplies Inc.’s WACC is 7%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): -12.63% 26.46% 30.64% 29.24% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion,…arrow_forwardOther things held constant, which of the following would increase the NPV of a project being considered? A shift from straight-line depreciation to MACRS Making the initial investment in the first year rather than spreading it out over the first three years An increase in the discount rate associated with the project An increase in required net operating working capital None of the abovearrow_forwardYou are evaluating a project that costs $1,500,000; has a six-year life. Assume that depreciation is straight line to zero over the life of the project. Sales are projected at 81,000 units per year. Price per unit is $34.50; variable cost per unit is $20.50; and fixed costs are $700,000 per year. The tax rate is 35%, and you require an 12% return on this project. Calculate the base-case cash flow and NPV . b. What is the sensitivity of NPV to a 1000 unit decrease in projected sales?arrow_forward
- a. If NPV is negative, company usually rejects the project. While, if ARR is greater than cost of capital, company accept the project. Last, if Profitability index is greater than 1, accept the project.b. If IRR on investment is zero, its annual cash flows is equal to its required investment. A• FF B• TT C• TF D• FTarrow_forwardFind the modified internal rate of return (MIRR) for a proposed project costing $5,489. Assume that the appropriate cost of capital for projects of this risk level, at this company is 11.46%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22%, please enter 20.22 - do not include the % symbol, and use at least two decimal places). Year 1 Year 2 Year 3 Year 4 Year 5 $6,100 $10,836 $9,527.1 $13,000 $7,285arrow_forward1 Downside scenarios Consider a proposal to produce and market a new tennis racquet. The most likely outcome scenario for the project incl. Expected sales of 30,000 units per year, Unit price of $200, Variable cost per racquet of $120, Fixed cost of $1,200,000. The project will last for 10 years and requires an initial investment of $4 million, which will be depreciated straight-line over the project life to a fnal value of zero. The firm´s tax rate is 30%, and the required rate of return is 12%. 1. What is the project NPV? However, you recognize that some of these estimates are subject to error. Sales could fall 20% below expectations for the life of the project and, if that happens, the unit price would probably be only $150. The good news is that Öxed costs could be as low as $800,000, and total Variable costs1 would decline in proportion to sales. 2. What is NPV in the worst-case scenario?3. How else could you consider the downside scenario in your NPV calculation? (Answer…arrow_forward
- A project has fixed costs of $2,100 per year, depreciation charges of $600 a year, annual revenue of $10,800, and variable costs equal to two-thirds of revenues. a. If sales increase by 20%, 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.) What is the Pretax profits increase (%)? b. What is the degree of operating leverage of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places.) What is the degree of operation leverage?arrow_forwardConsider a project with free cash flows in one year of $134,759 in a weak market or $168,566 in a strong market, with each outcome being equally likely. The initial investment required for the project is $110,000, and the project's unlevered cost of capital is 20%. The risk-free interest rate is 9%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that is, what is the initial market value of the unlevered equity? c. Suppose the initial $110,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM? Assume that the risk-free rate…arrow_forwardYou are considering an investment project with the following financial information: Required investment = $500,000 Project life = 5 years Salvage value = $50,000 Depreciation method = straight-line deprecation (no half-year convention) Unit price = $40 Unit variable cost = $18 Fixed annual cost = $230,000 Annual sales volume = 100,000 units Tax rate = 35% MARR = 15% The company is concerned about the price estimate they have used to calculate the rate of return. Using sensitivity analysis, how much can the price vary to still break-even? The company believes that their estimates for unit price, demand, variable cost, fixed cost, and salvage value are accurate to +/- 10%. Using scenario analysis compare the base case to the best-case and worst-case scenarios.arrow_forward
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