chapter 11 finance questions

1.

In a slow year, Deutsche Burgers will produce 3.8 million hamburgers at a total cost of $5.4 million. In a good year, it can produce 5.8 million hamburgers at a total cost of $6.5 million.

 

a. What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

 

  Fixed cost $ million

 

b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Variable cost $ per burger

 

c. What is the average cost per burger when the firm produces 3 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Average cost $ per burger

 

d. What is the average cost per burger when the firm produces 4 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Average cost $ per burger

 

e. Why is the average cost lower when more burgers are produced?
   
 
The fixed costs are spread across more burgers.
Fixed costs are constant per burger.
Variable costs are lower per burger.

2.

A project currently generates sales of $16 million, variable costs equal 50% of sales, and fixed costs are $3.2 million. The firm’s tax rate is 40%. Assume all sales and expenses are cash items.

 

a. What are the effects on cash flow, if sales increase from $16 million to $17.6 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)

 

  Cash flow by $

 

b. What are the effects on cash flow, if variable costs increase to 60% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

 

  Cash flow by $

3.

Finefodder’s analysts have come up with the following revised estimates for the Gravenstein store:

 

  Range  
  Pessimistic   Expected   Optimistic  
  Investment $ 4,800,000     $ 4,740,000     $ 4,620,000    
  Sales   13,000,000       21,000,000       25,000,000    
  Variable costs as % of sales   73       72       70    
  Fixed cost $ 2,400,000     $ 2,300,000     $ 2,100,000    

 

Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straight-line over the project’s life. Conduct a sensitivity analysis for each variable and range and compute the NPV for each. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not in millions.)

 

  NPV of Gravenstein Store
  Pessimistic Expected Optimistic
  Investment $ $ $
  Sales $ $ $
  Variable costs as % of sales $ $ $
  Fixed cost $ $ $

4.

The following estimates have been prepared for a project:
Fixed costs: $27,000
Depreciation: $18,000
Sales price per unit: $3
Accounting break-even: 20,000 units
 
What must be the variable cost per unit? (Round your answer to 2 decimal places.)

 

  Variable cost $ per unit

5.

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $40. The fixed costs incurred each year for factory upkeep and administrative expenses are $219,000. The machinery costs $1.5 million and is depreciated straight-line over 10 years to a salvage value of zero.

 

a. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.)

 

  Break-even sales diamonds per year

 

b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 40%, a 10-year project life, and a discount rate of 14%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

  Break-even sales diamonds per year

6,

You are evaluating a project that will require an investment of $17 million that will be depreciated over a period of 18 years. You are concerned that the corporate tax rate will increase during the life of the project.

 

a. Would this increase the accounting break-even point?
   
 
Yes
No

 

b. Would it increase the NPV break-even point?
   
 
Yes
No

7.

Modern Artifacts can produce keepsakes that will be sold for $60 each. Nondepreciation fixed costs are $2,000 per year, and variable costs are $30 per unit. The initial investment of $5,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%.

 

a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

  Acounting break-even level of sales units

 

b. What is the NPV break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

  NPV break-even level of sales units

 

c. What is the accounting break-even level of sales if the firm’s tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

  Acounting break-even level of sales units

 

d. What is the NPV break-even level of sales if the firm’s tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

  NPV break-even level of sales units

8.

You estimate that your cattle farm will generate $.40 million of profits on sales of $8 million under normal economic conditions and that the degree of operating leverage is 2. (Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

 

a. What will profits be if sales turn out to be $3.3 million?

 

  Profit will to $ million.

 

b. What if they are $12.0 million?

 

  Profit will to $ million.

9.

Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $700 per year, and variable costs are $40 per unit. The initial investment of $2,100 will be depreciated straight-line over its useful life of 3 years to a final value of zero, and the discount rate is 16%.

 

a. What is the degree of operating leverage of Modern Artifacts when sales are $7,750? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Degree of operating leverage  

 

b. What is the degree of operating leverage when sales are $13,500? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Degree of operating leverage  

 

c. Why is operating leverage different at these two levels of sales?

 

  Degree of operating leverage is when profits are .

10.

A silver mine can yield 15,000 ounces of silver at a variable cost of $36 per ounce. The fixed costs of operating the mine are $45,000 per year. In half the years, silver can be sold for $52 per ounce; in the other years, silver can be sold for only $26 per ounce. Ignore taxes.

 

a. What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined? (Do not round intermediate calculations.)

 

  Average cash flow $

 

b. Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine. Assume fixed costs are incurred only if the mine is operating. (Do not round intermediate calculations.)

 

  Average cash flow $

11.

An auto plant that costs $130 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $190 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.

 

a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)

 

  Expected NPV $ million

 

a-2. Would you build the plant?
   
 
Yes
No

 

Suppose that the plant can be sold for $125 million to another automaker if the auto line is not successful.

 

b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

 

  Expected NPV $ million

 

b-2. Would you build the plant?
   
 
Yes

(Click to select)

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