UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 7, Problem 12QP
Summary Introduction
To determine: Sensitivity of operating cash flow to the changes in quantity sold.
Introduction:
The technique which is used to determine the value of a variable (independent) that influences another particular variable (dependent) under some set of assumptions is termed as sensitivity analysis.
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Consider a project with the following information: Initial fixed asset investment =
$550,000; straight-line depreciation to zero over the 4-year life; zero salvage value;
price $54; variable costs = $35; fixed costs = $228,000, quantity sold = 116,000 units;
tax rate = 23 percent. How sensitive is OCF to changes in quantity sold? (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
AOCFIAQ
9.24
3.
Consider a three-year project with the following information: initial fixed asset investment = $698,000; straight-line
depreciation to zero over the four-year life; zero salvage value; price = $34.15; variable costs = $22.60; fixed costs
= $210,500; quantity sold = 96,500 units; tax rate = 40 percent.
Required:
What is the OCF at the base-case quantity sold?
OCF
What is the OCF at 97,500 units sold?
OCF
How sensitive is OCF to changes in quantity sold?
AOCF/AQ
$
$
Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation to zero
over the four-year life; zero salvage value; price = $31; variable costs = $24; fixed costs = $200,000; quantity sold = 89,000 units; tax
rate = 34%.
How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round the final answer to 2 decimal
places. Omit $ sign in your response.)
AOCF/AQ
Chapter 7 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Decision Trees Ang Electronics. Inc., has...Ch. 7 - Decision Trees The manager for a growing firm is...Ch. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Financial Break-Even Niko has purchased a brand...Ch. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Project Analysis You are considering a new product...Ch. 7 - Project Analysis McGilla Golf has decided to sell...Ch. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Option to Wait Hickock Mining is evaluating when...Ch. 7 - Abandonment Decisions Allied Products, Inc., is...Ch. 7 - Prob. 24QPCh. 7 - Scenario Analysis You are the financial analyst...Ch. 7 - Scenario Analysis Consider a project to supply...Ch. 7 - Sensitivity Analysis In Problem 26, suppose youre...Ch. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Financial Break-Even The Cornchopper Company is...
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- Consider a project with a life of 4 years with the following information: initial fixed asset investment = $370,000; straight - line depreciation to zero over the 4 - year life; zero salvage value; price = $26; variable costs = $18; fixed costs $177,600; quantity sold = 85,248 units; tax rate 25 percent. How sensitive is OCF to changes in quantity sold? Multiple Choice $6.84 $6.00 $4.26 $0.17 $7.74arrow_forwardConsider a project with a life of 3 years with the following information: initial fixed asset investment = salvage value; price = $35; variable costs $13; fixed costs = $112,000; quantity sold = 53,760 units; tax rate = 23 percent. How sensitive is OCF to changes in quantity sold? $320,000; straight-line depreciation to zero over the 3-year life; zero Multiple Choice $21.85 $0.06 $19.31arrow_forwardPlot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data below. Vary only one parameter at a time, each within the range of -20% to +20%. MARR is 3%/year. Project life is 4 years. Based on your graph, which parameter shows the MOST sensitivity? Initial Cost: $120,000- Annual Revenue: $25,000 - Salvage Value: $35,000 O Cannot be determined O Annual Revenue O Initial Cost O Salvage Valuearrow_forward
- 1. Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $604,000, has an 8-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 55,000 units per year. Price per unit is $36, variable cost per unit is $17, and fixed costs are $685,000 per year. The tax rate is 21 percent and we require a return of 15 percent on this project. a. Calculate the accounting break-even point. b. 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. c. 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. 2. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +10…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_forwardThe most possible values of an investment project are as follows: First cost, $ 300,000 Annual operating cost, $ 10,000 Annual benefit, $ 120,000 Salvage value, $ 80,000 Life, year 30 MARR per year 15% The most uncertain parameters are annual operating cost and annual benefit. Perform a multiparameter sensitivity analysis and write your conclusions. Consider the cash flow given. Calculate the payback period with time value. Calculate the B/C ratios based on both PW and AW.arrow_forward
- If a $300,000 investment has a project profitability index of 0.25, what is the netpresent value of the project?a. $75,000b. $225,000c. $25,000d. $275,000arrow_forwardThe most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: $ 50 $ 30 $ 490,000 48,000 units per year However, you recognize that some of these estimates are subject to error. Suppose each variable turns out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $2.3 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 21%, and the required rate of return is 10%. a. NPV b. NPV a. What is project's NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project's NPV in the worst-case scenario? Note: For all the requirements, a negative amount should be indicated by a minus sign. Enter your answers in dollars, not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. 4arrow_forwardProblem: Lehigh Products Company is considering the purchase of new automated equipment. The project has an expected net present value of $250,000 with a standard deviation of $100,000. Question: 1. What is the probability that the project will have a net than $50,000, assuming that present value less net present value is normally distributed?arrow_forward
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