Consider Bloopers mining project. Suppose that by investing an additional $1,000,000 initially, Blooper could reduce variable costs to 30% of sales. Use Spreadsheet 10.1.
a. Find the incremental NPV for the increased investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
b. At what level of sales will accounting profits be unchanged if the firm makes the new investment? Assume the equipment receives the same straight-line depreciation treatment as in the original example. (Hint: Focus on the projects incremental effects on fixed and variable costs.) (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.)
c. What is the NPV break-even point in total sales if the firm invests in the new equipment? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.)
d. If the Blooper project operates at accounting break-even, will net present value be positive or negative?
Positive
Negative
SPREADSHEET 10.1 Financial projections for Blooper's magnoosium mine (dollar values in thousands). This table repeats the analysis in Spreadsheet 9.1 except that expenses are now broken down into variable and fixed expenses. 1 A. I 2 Initial investment ($ thousands 3 Salvage value ($ thousands 4 Initial revenues ($ thousands 5 | Variable costs (% of revenues 6 Initial fixed costs ($ thousands 7 Inflation rate 8 Discount rate 9 | Receivables % of sa 10 Inve 11 Tax rate 12 13 Year 14 B. Fixed assets 15 Investments in fixed assets 16 Sales of fixed assets 17 Cash flow from investment in fixed assets 0,000 2,000 15,000 40,0% 4,000 5.0% 12.0% 16.7% 15.0% 35.0% of next 5 6 10,000 1,300 1,300 -10,000 19 C. 20 Revenues 21 Variable ex 22 Fixed ex 23 Depreciation 24 Pretax profit 25 Ta>x rating cash flow 15,00015,750 16,538 17,364 18,233 6,000 6,300 6,615 6,946 7,293 4.000 4,200 4,410 4,631 4,862 2,000 2,000 2,000 2,000 2,000 3,000 3.250 3,513 3,788 4,078 1,0501.138 1,229 1,326 1,427 1,950 2,113 2,283 2.462 2,650 3,950 4.113 4,283 4,462 4,650 26 Profit after tax 27 28 29 D. Working capital 30 Work 31 Change in working capital 32 Cash flow from investment in working ca rating cash flow 0 2251,679-3,039 -1,500-2,575204-214-225 1,679 3.039 1,500 4.075 4.279 4,493 4,717 3.039 1,500 2,575 204 214 34 E 35 Total 36 Discount factor 37 PV of cash flow 38 Net present value ect valuation -11,5001,3 4,339 97 0.712 0.636 0.567 0.507 t cash flow -11,500 1,228 3.1162,896 2,693 3,591 198 4,223 SPREADSHEET 10.1 Financial projections for Blooper's magnoosium mine (dollar values in thousands). This table repeats the analysis in Spreadsheet 9.1 except that expenses are now broken down into variable and fixed expenses. 1 A. I 2 Initial investment ($ thousands 3 Salvage value ($ thousands 4 Initial revenues ($ thousands 5 | Variable costs (% of revenues 6 Initial fixed costs ($ thousands 7 Inflation rate 8 Discount rate 9 | Receivables % of sa 10 Inve 11 Tax rate 12 13 Year 14 B. Fixed assets 15 Investments in fixed assets 16 Sales of fixed assets 17 Cash flow from investment in fixed assets 0,000 2,000 15,000 40,0% 4,000 5.0% 12.0% 16.7% 15.0% 35.0% of next 5 6 10,000 1,300 1,300 -10,000 19 C. 20 Revenues 21 Variable ex 22 Fixed ex 23 Depreciation 24 Pretax profit 25 Ta>x rating cash flow 15,00015,750 16,538 17,364 18,233 6,000 6,300 6,615 6,946 7,293 4.000 4,200 4,410 4,631 4,862 2,000 2,000 2,000 2,000 2,000 3,000 3.250 3,513 3,788 4,078 1,0501.138 1,229 1,326 1,427 1,950 2,113 2,283 2.462 2,650 3,950 4.113 4,283 4,462 4,650 26 Profit after tax 27 28 29 D. Working capital 30 Work 31 Change in working capital 32 Cash flow from investment in working ca rating cash flow 0 2251,679-3,039 -1,500-2,575204-214-225 1,679 3.039 1,500 4.075 4.279 4,493 4,717 3.039 1,500 2,575 204 214 34 E 35 Total 36 Discount factor 37 PV of cash flow 38 Net present value ect valuation -11,5001,3 4,339 97 0.712 0.636 0.567 0.507 t cash flow -11,500 1,228 3.1162,896 2,693 3,591 198 4,223
