NPV:
1 The following are the cash flows of two projects: 
Year 
Project A 
Project B 
0 
−$260 
−$260 
1 
140 
160 
2 
140 
160 
3 
140 
160 
4 
140 


a. 
If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Project 
NPV 
A 
$ 
B 


b. 
Which of these projects is worth pursuing? 






2 The following are the cash flows of two projects: 



Year 
Project A 
Project B 


0 
−$370 
−$370 


1 
200 
270 


2 
200 
270 


3 
200 
270 


4 
200 









a. 
Calculate the NPV for both projects if the discount rate is 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 


Project 
NPV 



A 
$ 



B 







3 The following are the cash flows of two projects: 

Year 

Project A 

Project B 



0 

– 
$ 
210 


– 
$ 
210 




1 



90 




110 




2 



90 




110 




3 



90 




110 




4 



90 












If the opportunity cost of capital is 12%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.) 

Project 
Profitability index 


A 



B 



4 The following are the cash flows of two projects: 
Year 
Project A 
Project B 
0 
−$300 
−$300 
1 
180 
200 
2 
180 
200 
3 
180 
200 
4 
180 


What is the payback period of each project? (Round your answers to 2 decimal places.) 

Project 
Payback Period 

A 
years 

B 
years 

5 A project that costs $3,200 to install will provide annual cash flows of $900 for each of the next 6 years. 

Calculate the NPV if the discount rate is 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 

NPV 
$ 

How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 
Discount rate 
% 
6 A new computer system will require an initial outlay of $17,000, but it will increase the firm’s cash flows by $3,400 a year for each of the next 7 years. 
a. 
Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%. What if it is 15%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Rate of Return 

NPV 
Worth Installing 
10% 
$ 









15% 
$ 














b. 
How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 

Maximum discount rate 
% 
7 Here are the cash flows for a project under consideration: 

C_{0} 

C_{1} 

C_{2} 


− 
$ 
7,230 

+ 
$ 
5,100 

+ 
$ 
18,720 



a. 
Calculate the project’s net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank  be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.) 
Discount rate 
Net present value 
0% 
$ 
50% 
$ 
100% 
$ 

b. 
What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) 
IRR 
% 
8 Consider projects A and B with the following cash flows: 


C_{0} 

C_{1} 

C_{2} 

C_{3} 


A 

− 
$ 
43 

+ 
$ 
27 

+ 
$ 
27 

+ 
$ 
27 

B 

− 

68 

+ 

37 

+ 

37 

+ 

37 


a1. 
What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Project 
NPV 
A 
$ 
B 
$ 

a2. 
Which project has the higher NPV? 






b1. 
What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Project 
Profitability index 
A 

B 

9 Here are the expected cash flows for three projects: 

Cash Flows (dollars) 

Project 
Year: 
0 

1 

2 

3 

4 


A 

− 
5,300 

+ 
1,075 

+ 
1,075 

+ 
3,150 


0 

B 

− 
1,300 


0 

+ 
1,300 

+ 
2,150 

+ 
3,150 

C 

− 
5,300 

+ 
1,075 

+ 
1,075 

+ 
3,150 

+ 
5,150 


a. 
What is the payback period on each of the projects? 
Project 
Payback period 
A 
years 
B 
years 
C 
years 

b. 
If you use a cutoff period of 2 years, which projects would you accept? 






c. 
If you use a cutoff period of 3 years, which projects would you accept? 






d1. 
If the opportunity cost of capital is 12%, calculate the NPV for projects A, B, and C. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Project 
NPV 
A 
$ 
B 
$ 
C 
$ 

d2. 
Which projects have positive NPVs? 






Subject Project Analysis:
1 In a slow year, Deutsche Burgers will produce 2.9 million hamburgers at a total cost of $4.3 million. In a good year, it can produce 4.9 million hamburgers at a total cost of $5.5 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 2 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 3 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 
Average cost 
$ per burger 
2 A project currently generates sales of $19 million, variable costs equal 40% of sales, and fixed costs are $3.8 million. The firm’s tax rate is 35%. Assume all sales and expenses are cash items. 
a. 
What are the effects on cash flow, if sales increase from $19 million to $20.9 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 50% 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 
$ 
5,400,000 


$ 
5,280,000 


$ 
5,160,000 


Sales 

12,000,000 



16,000,000 



22,000,000 


Variable costs as % of sales 

70 



69 



67 


Fixed cost 
$ 
2,200,000 


$ 
1,900,000 


$ 
1,700,000 



Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straightline 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: $5,400 
Depreciation: $3,600 
Sales price per unit: $3 
Accounting breakeven: 50,000 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 $208,000. The machinery costs $1.7 million and is depreciated straightline over 10 years to a salvage value of zero. 
a. 
What is the accounting breakeven level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.) 
Breakeven sales 
diamonds per year 
b. 
What is the NPV breakeven level of diamonds sold per year assuming a tax rate of 35%, a 10year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 
Breakeven sales 
diamonds per year 
Skip #6
7 Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $1,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 will be depreciated straightline over its useful life of 5 years to a final value of zero, and the discount rate is 10%. 
a. 
What is the accounting breakeven level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 
Acounting breakeven level of sales 
units 
b. 
What is the NPV breakeven level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 
NPV breakeven level of sales 
units 
c. 
What is the accounting breakeven 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 breakeven level of sales 
units 
d. 
What is the NPV breakeven 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 breakeven level of sales 
units 
8 You estimate that your cattle farm will generate $.25 million of profits on sales of $5 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 $2.5 million? 
Profit will 
Decrease to 
$ million. 
b. 
What if they are $7.5 million? 
Profit will 
Increase to 
$ million. 
9 Modern Artifacts can produce keepsakes that will be sold for $120 each. Nondepreciation fixed costs are $1,800 per year, and variable costs are $70 per unit. The initial investment of $5,400 will be depreciated straightline over its useful life of 6 years to a final value of zero, and the discount rate is 18%. 
a. 
What is the degree of operating leverage of Modern Artifacts when sales are $7,440? (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 $12,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 
Degree of operating leverage 

10. A silver mine can yield 14,000 ounces of silver at a variable cost of $30 per ounce. The fixed costs of operating the mine are $63,000 per year. In half the years, silver can be sold for $46 per ounce; in the other years, silver can be sold for only $23 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 $140 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $180 million if the line is successful but only $80 million if it is unsuccessful. You believe that the probability of success is only about 30%. You will learn whether the line is successful immediately after building the plant. 
a1. 
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 
Suppose that the plant can be sold for $140 million to another automaker if the auto line is not successful. 
b1. 
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 
Subject  Business 
Due By (Pacific Time)  11/21/2015 11:59 pm 
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