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Chapter 10 Solution Corporate Finance Essay

1021 words - 5 pages

CHAPTER 10

Project Analysis

8. We assume that the idea for a new obfuscator machine originates with a plant manager in the Deconstruction Division. (Keep in mind however that, in addition to bottom-up proposals, such as the obfuscator machine proposal, top-down proposals also originate with divisional managers and senior management.) Other steps in the capital budgeting process include the following:

• Many large firms begin the process with forecasts of economic variables, such as inflation and GDP growth, as well as variables of particular interest to the industry, such as prices of raw materials and industry sales projections.
• The plant manager, often in ...view middle of the document...

The present value of $1 to be received one year from now, discounted at 18% is: $0.8475
The present value of $1 × (1 – 0.08) (that is, $0.92) to be received one year from now, discounted at 10% is: $0.8364
The error increases substantially because the incorrect factor (i.e., 1.18) is compounded, causing the denominator of the present value calculation to be greatly overstated so that the present value is greatly understated.

12. a.
| |Year 0 |Years 1-10 |
|Investment |¥30 B | |
|1. Revenue | |¥37.500 B |
|2. Variable Cost | |26.000 |
|3. Fixed Cost | |3.000 |
|4. Depreciation | |3.000 |
|5. Pre-tax Profit (1-2-3-4) | |¥5.500 |
|6. Tax | |2.750 |
|7. Net Operating Profit (5-6) | |¥2.750 |
|8. Operating Cash Flow (4+7) | |5.750 |
|NPV = |+ ¥5.33 B |

b.

| |Inflows |Outflows | | | |
|Unit Sales |Revenues |Investment |V. Costs |F. Cost |Taxes |PV |PV |NPV |
|(000’s) |Yrs 1-10 |Yr 0 |Yr 1-10 |Yr 1-10 |Yr 1-10 |Inflows |Outflows | |
|0 |0.00 |30.00 |0.00 |3.00 |-3.00 |0.00 |-30.00 |-30.00 |
|100 |37.50 |30.00 |26.00 |3.00 |2.75 |230.42 |-225.09 |5.33 |
|200 |75.00 |30.00 |52.00 |3.00 |8.50 |460.84 |-420.18 |40.66 |

Set NPV equal to zero and solve for Q:

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c. The break-even point is the point where the present value of the cash flows, including the opportunity cost of capital, yields a zero NPV.

d. To find the level of costs at which the project would earn zero profit, write the equation for net profit, set net profit equal to zero, and solve for variable costs:
Net Profit = (R – VC – FC - D) ( (1 – t)
0 = (37.5 – VC – 3.0 – 1.5) ( 0.50
VC = 33.0
This will yield zero profit.
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