Questions Set 71:

Solution

Cash Flow DOL: The law firm of Dewey, Cheatem, and Howe has monthly fixed costs of $115,000, EBIT of $278,000, and depreciation charges on its office furniture and computers of $7,700. The firm’s Cash Flow DOL is EBIT: WalkAbout Kangaroo Shoe Stores forecasts that it will sell 7,930 pairs of shoes next year. The firm buys its shoes for $50 per pair from the wholesaler and sells them for $75 per pair. The firm will incur fixed costs plus depreciation and amortization of $100,000 per year. If actual sales next year are 9,746 pairs of shoes, EBIT will increase by EBIT: Specialty Light Bulbs anticipates selling 3,000 light bulbs this year at a price of $16 per bulb. It costs Specialty $10 in variable costs to produce each light bulb, and the fixed costs for the firm are $10,000. Specialty has an opportunity to sell an additional 1,000 bulbs next year at the same price and variable cost, but by doing so the firm will incur an additional fixed cost of $5,000 if it chooses to sell the additional bulbs. The additional sales would change Specialty’s EBIT by $___, and therefore Specialty Should or Should not produce and sell the additional bulbs. Pretax operating cash flow break-even: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Each candle will be sold for $10. If the large factory is chosen, the cost per unit to produce each candle will be $2.50, while the cost per unit will be $7.30 for the small factory. The large factory would have fixed cash costs of $2 million and a depreciation expense of $300,000 per year, while those expenses would be $500,000 and $100,000 in the small factory. The pretax operating cash flow breakeven point for the large factory is ____. The pretax operating cash flow breakeven point for the small factory is _____. Profitability index: Suppose that you faced the following projects but had only $30,000 to invest. You should invest in project(s) A. A and B only B. B and C only C. A, B, and C only D. B, C and D only C. C and D only Project Cost ($) NPV($) A $8,000 $4,000 B 11,000 7,000 C 9,000 5,000 D 7,000 4,000 Accounting operating profit break-even: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Each candle will be sold for $10. If the large factory is chosen, the cost per unit to produce each candle will be $2.32, while the cost per unit will be $7.47 for the small factory. The large factory would have fixed cash costs of $2.1 million and a depreciation expense of $300,000 per year, while those expenses would be $470,000 and $100,000 in the small factory. If Dandle uses the small factory, the accounting break-even point is ___ units. If Dandle uses the large factory, the accounting break-even point is ____units. Cash Flow DOL: The Vinyl CD Co. is going to take on a project that will increase its EBIT by $81,000 next year. The firm’s fixed cost cash expenditures are expected to increase by $82,000, and depreciation and amortization will increase by $74,000 next year. If the project yields an additional 10 percent in revenue, the percentage increase in pretax operating cash flow driven by the additional revenue will be____% Silver Polygon, Inc., has determined that if its revenues were to increase by 10 percent, then EBIT would increase by 27 percent to $140,000. The fixed costs (cash only) for the firm are $102,000. Given the same 10 percent increase in revenues, EBITDA would change by___% You are analyzing two proposed capital investments with the following cash flows: Year Project X ($) Project Y ($) 0 $(20,000) $(20,000) 1 12,617 6,375 2 5,797 6,375 3 5,663 6,375 4 1,840 6,375 The cost of capital for both projects is 10 percent. The PI for project X is ___ and the PI for project Y is ____. If you have unlimited funds you should invest in both projects, project X, project Y, or neither projects. If they are mutually exclusive you should invest in project Y, neither project, or project X. Profitability index: Suppose that you faced the following projects but had only $25,000 to invest. You should invest in project(s) Project Cost ($) NPV($) A $8,000 $4,000 B 11,000 7,000 C 9,000 5,000 D 7,000 4,000 A. A, B, and C only B. A and B only C. B and D only D. A, C and D only E. B and C only

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: