Question
The information below is used for the next 8 questions A project requires an initial investment of $10,000, straight-line depreciable to zero over 4 years.
The information below is used for the next 8 questions
A project requires an initial investment of $10,000, straight-line depreciable to zero over 4 years. The discount rate is 10%. Your tax bracket is 34% and you receive a tax credit for negative earnings in
the year in which the loss occurs. Additional information for variables with forecast error are shown below.
DOL =1 + ($4,000/$4,007.32) = 1.998
12 What is the base case NPV for the project?
A) $1,523
B) $4,974
C) $5,247
D) $6,529
Unit Sales Price/unit Variable cost/unit Fixed costs
Base Case 3,000
$14 $9 $9,000
Lower Bound 2,750
$13 $8 $8,500
Upper Bound 3,250
$16
$10 $10,000
NPV= 0 implies $9,000 = OCF(PVIFA16%,3) OCF = $4,007.32
QF = ($4,000 + $4,007.32)/($65 33) = 250
PVAF=(1-1/(1+0.16)^3)/0.16= 2.24589
E) $8,281
13 What is the worst case NPV for the project?
A) $11,594
B) $10,967
C) $ 4,423
D) $ 2,327
E) $3,677
14 What is the best case NPV for the project? A)
$5,247 $26,462 $29,306 $32,327 $34,252
B) C) D) E)
15 What is the base case accounting break-even point?
A) 1,083
B) 1,500
C) 1,800
D) 2,300
E) 2,237
16 What is the base case cash break-even point?
A) 1,500
B) 1,800
C) 1,917
D) 2,300
E) 2,237
17 What is the base case financial break-even point? Ignore taxes.
A) 1,500
B) 1,917
C) 2,300
D) 2,431
E) 2,535
18 Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units @ $40 per
unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; interest expense = $50,000 per year; project life = 10 years. What is the net income for this project if the corporate tax rate is 34%? You may assume straight-line depreciation and a discount rate of 12%.
A) $119,000
B) $165,000
C) $198,000
D) $264,000
E) $297,000
165000 =(35000*(40-25)-125000-50000-100000)*(1-0.34)
19 Suppose, the project has OCF of $55000 and its fixed costs are $7000. All else the same, if fixed costs increase to $7300 (sales and other costs stay the same)
which of the following will be true? I. Operating leverage will increase
II. Accounting break-even will increase III. Cash break-even increase IV. Operating cash flow increase
A) I only
B) II only
C) I and II only
D) II and IV only
E) I, II, and III only
F) I, II, and IV only
G) I, II, III, and IV
20 The project has the following information: straight-line depreciation to zero, Initial investment in fixed assets = $20,000; required level of net working capital = $5,000; life = 4 years; Sales = $17,000 per year; total annual costs=$7000, no salvage value; tax rate = 35%.
What is NPV if the discount rate = 18%
A) -$139,6000
B) -$997,000
C) -$228,000
D) $22,000
E) $840,000
F) $1,113,000
G) $1,687,000
H) $2,899,000
PLEASE EXPLAIN WITH FORMULAS
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