A-18 Appendix A Solutions to Self-Test Questions and Problems
NPV! "$67,000 # $14,580/(1.14)^1 # $17,700/(1.14)^2 # $19,720/(1.14)^3
! "$27,281
Alternatively, using a! nancial calculator, you would enter CF 0! "67000,
CF 1! 14580, CF 2! 17700, CF 3! 19720, and I/YR! 14 and then solve for
NPV! "$27,281.Scenario Probability NPV
Best case 25% $ 34,011
Base case 50 579
Worst case 25 "27,281Expected NPV! (^) $ 1,972
σNPV! [0.25($34,011 " $1,972)^2 # 0.50($579 " $1,972)^2 # 0.25("$27,281 " $1,972)^2 ]1/2
σNPV! [$256,624,380 # $970,225 # $213,934,502]1/2
σNPV! $21,715
CVNPV! $21,715/$1,972! 11.01
Because the expected NPV of the project is still positive, the project will be
accepted; but it is risky.
Chapter 13
a. The following information is given in the problem:
Q! Units of output (sales)! 5,000
P! Average sales price per unit of output! $100
F! Fixed operating costs! $200,000
V! Variable costs per unit! $50
EBIT! Operating income! $50,000
Total assets! $500,000
Common equity! $500,000
(1) Determine the new EBIT level if the change is made:
New EBIT! P 2 (Q 2 ) " F 2 " V 2 (Q 2 )
New EBIT! $95(7,000) " $250,000 " $40(7,000)
! $135,000
(2) Determine the incremental EBIT:
∆EBIT! $135,000 " $50,000! $85,000
(3) Estimate the approximate rate of return on the new investment:
∆ROA! __∆EBIT
Investment
! ____$85,000
$400,000
! 21.25%
Since the ROA exceeds Olinde’s average cost of capital, this analysis suggests
that the! rm should go ahead and make the investment.
b. The change would increase the break-even point. Still, with a lower sales
price, it might be easier to achieve the higher new break-even volume.
Old: QBE! F
P " V
! __$200,000
$100 " $50
! 4,000 units
New: QBE! __F
P 2 " V 2
! ____$250,000
$95 " $40
! 4,545 units