Chapter 11

Problems 1-32
Input boxes in tan
Output boxes in yellow
Given data in blue
Calculations in red
Answers in green
NOTE: Some functions used in these spreadsheets may require that
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then "Excel Options," "Add-Ins" and select
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require that

Chapter 11
Question 1
Input area:

Variable material cost

Variable labor cost
b. Fixed costs
Production
c. Sales price
Depreciation

$
$
$
$
$

5.43
3.13
720,000
280,000
19.99
220,000

8.56

b. Total variable cost/year $

3,116,800

c. Cash breakeven
Accounting breakeven

62,992.13
82,239.72

Output area:

a. Total variable cost

Chapter 11
Question 2
Input area:

Variable material cost

Variable labor cost
Sales price
Production
Fixed costs
Extra order

$
$
$
$

24.86
14.08
135.00
120,000
1,550,000
5,000

Output area:

Total costs
$
6,222,800
Marginal cost
$
38.94
Average cost
$
51.86
Minimum acceptable revenue
$
194,700
Additional units should be produced only if the cost
of producing those units can be recovered.

Chapter 11
Question 3
Input area:

Price/unit
Variable cost/unit
Fixed costs
Quantity
Price accuracy
Variable cost accuracy
Fixed cost accuracy
Quantity accuracy

$
$
$

1,900
240
4,800,000
95,000
15%
15%
15%
15%

Output area:

Scenario
Base case
Best case
Worst case

Unit sales
95,000
109,250
80,750

$
$
$

Unit price
1,900.00
2,185.00
1,615.00

Unit variable cost

$
240.00 $
$
204.00 $
$
276.00 $

Fixed costs
4,800,000
4,080,000
5,520,000

Chapter 11
Question 4
Output area:

An estimate for the impact of changes in price on the profitability of the project can be found
the sensitivity of NPV with respect to price: DNPV/DP. This measure can be calculated by fin
the NPV at any two different price levels and forming the ratio of the changes in these param
Whenever a sensitivity analysis is performed, all other variables are held constant at their ba
values

e project can be found from

an be calculated by finding
hanges in these parameters.
eld constant at their base-case

Chapter 11
Question 5
Input area:

Initial cost
Project life
Units sales
Price/unit
Variable cost/unit
Fixed costs
Tax rate
Required return
b. New quantity for calculation
Projected sales change
c. New VC for calculation
Projected VC change

$
$
$

$
$

724,000
8
90,000
43.00
29.00
780,000
35%
15%
95,000
(500)
30.00
(1.00)

Output area:

a. Depreciation per year

Accounting breakeven
DOL

b. Base OCF
Base NPV
New quantity
OCF
NPV
DNPV/DQ
For a sales change of
the NPV would change

$
$

343,675
818,180.22
95,000
389,175
1,022,353.35
40.835
(500)
(20,417.31)

c. New variable cost

OCF
DOCF/DVC
If variable costs change by
then OCF would change by

$
$
$
$
$

30.00
285,175
(58,500.00)
(1.00)
58,500.00

$
$
$

90,500
62,179
9.619

Chapter 11
Question 6
Input area:

Initial cost
Project life
Units sales
Price/unit
Variable cost/unit
Fixed costs
Tax rate
Required return
Price uncertainty
Quantity uncertainty
Variable cost uncertainty
Fixed cost uncertainty

$
$
$

724,000
8
90,000
43.00
29.00
780,000
35%
15%
10%
10%
10%
10%

Output area:

Annual depreciation
Scenario
Base case
Best case
Worst case
Best-case OCF
Best-case NPV
Worst-case OCF
Worst-case NPV

$90,500
Unit sales
90,000
99,000
81,000
$
939,595.00
$ 3,492,264.85
$ (168,005.00)
$ (1,477,892.45)

$
$
$

Unit price Unit variable cost

43.00 $
29.00 $
47.30 $
26.10 $
38.70 $
31.90 $

Fixed costs
780,000
702,000
858,000

Chapter 11
Question 7
Input area:

a. $
b.
c.

Unit price Unit variable cost

3,020 $
2,275 $
38
27
11
4

Output area:

a. Accounting breakeven
Cash breakeven

27,517
18,792

b. Accounting breakeven
Cash breakeven

20,273
6,636

c. Accounting breakeven
Cash breakeven

291
171

Fixed costs
14,000,000 $
73,000
1,200

Depreciation
6,500,000
150,000
840

Chapter 11
Question 8
Input area:

a.
b.
c.

Accounting breakeven
112,800 $
165,000
4,385

Unit price Unit variable cost

41 $
30 $
?
43
98
?

Output area:

a. Depreciation

420,800

b. Unit price

69.36

c. Unit variable cost

37.57

Fixed costs
820,000
3,200,000 $
160,000

Depreciation
?
1,150,000
105,000

Chapter 11
Question 9
Input area:

Price per unit

Variable cost per unit
Fixed costs
Required return
Initial investment
Life

$
$
$
$

57.00
32.00
9,000
12%
18,000
4

Output area:

Accounting breakeven
Cash breakeven
OCF
Financial breakeven
DOL

540
360
5,926.22
597
2.519

Chapter 11
Question 10
Input area:

Accounting breakeven
Cash breakeven
Life
Fixed costs
Variable cost/unit
Requried return

$
$

15,500
13,200
5
140,000
24
16%

Output area:

Price
Depreciation
Initial investment
OCF
Financial breakeven

$
$
$
$

34.61
24,394
121,970
37,250.69
16,712

Chapter 11
Question 11
Input area:

Initial output level

DOL
New output level

65,000
3.40
70,000

Output area:

DOCF

26.15%

The new level of operating leverage is

lower
since FC/OCF is
smaller.

Chapter 11
Question 12
Input area:

Initial output level

DOL
New output level
Fixed costs
Units

65,000
3.40
70,000
130,000
58,000

Output area:

OCF

54,167

% change in Q

-10.77%

% change in OCF

-36.62%

New OCF
New DOL

34,333
4.786

Chapter 11
Question 13
Input area:

Fixed costs
Units sold
OCF
New units sold

$
$

73,000
8,000
87,500
8,500

Output area:

Original DOL

1.8343

%DQ

6.25%

%DOCF
New OCF
New DOL

11.46%
$

97,531.25
1.7485

Chapter 11
Questions 14,15
Input area:

Initial output
Initial DOL
Initial OCF
New output
New output

10,000
2.35
43,000
11,000
9,000

Fixed costs
OCF at
OCF at

= $
11,000 = $
9,000 = $

58,050.00
53,105.00
32,895.00

DOL at
DOL at

11,000 =
9,000 =

Output area:

2.0931
2.7647

Chapter 11
Question 16
Output area:

a. IRR = 0%

payback = N years

b. IRR = -100%

payback = negative

c. IRR = R%

payback < N years

NPV = I[(I/N)(PVIFA R%,N) - 1]

NPV = -I
NPV = 0

Chapter 11
Questions 17-18
Input area:

Initial fixed assets

Life of project (yrs)
Price
Variable costs
Fixed costs
Quantity sold
Tax rate
Change in quantity

$
$
$
$

490,000
4
32
19
210,000
110,000
34%
1,000

Output area:

OCF at
OCF at
DOCF/DQ

DOL at

110,000 units $
111,000 units $
$

8.58

110,000 units

Accounting break-even
DOL at

846,850.00
855,430.00

1.2480
25,576

25,576 units

2.7143

Chapter 11
Question 19
Input area:

Initial cost
Life
Unit sales
Price/unit
Variable cost/unit
Fixed costs
Required return
Tax rate
a. Unit sales uncertainty
Variable cost uncertainty
Fixed cost uncertainty
b. New fixed costs

$
$
$

1,700,000
4
190
18,000
11,200
410,000
12%
35%
10%
10%
10%
420,000

Output area:

a. Unit sales
Variable cost/unit
Fixed costs

Upper bound
209
$
12,320
$
451,000

Depreciation

425,000

Base case OCF

Base case NPV

$
$

722,050.00
493,118.10

Best case OCF

Best case OCF

$
984,832.00
$ 1,291,278.83

Worst case OCF

Worst case NPV

$
$

486,932.00
(221,017.41)

b. OCF with fixed costs

OCF
NPV

$
$
$

420,000.00
715,550.00
473,375.32

Lower bound
$
$

171
10,080
369,000

DNPV/DFC
$
(1.974)
For every dollar FC increase, NPV changes by:
c. Cash breakeven
d. Accounting breakeven
At this level of output, DOL
For every 1% increase in unit sales,
OCF will increase by

60
123
1.9647
1.9647%

(1.974)

Chapter 11
Question 20
Input area:

Price per unit

Variable cost per unit
Marketing study
Unit sales
High price units lost
High price club's price
High price club's VC
Cheap club units gained
Cheap club's price
Cheap club's VC
Fixed costs
R&D
Project cost
Net working capital
Tax rate
Cost of capital

$
$
$

$
$
$
$
$
$
$
$

750
330
150,000 Sunk cost
51,000
11,000
1,200
650
9,500
420
190
8,100,000
1,000,000 Sunk cost
22,400,000
1,250,000
40%
10%

Output area:

Initial cash outlay

Plant & Equipment
NWC
Total

$
$
$

(22,400,000)
(1,250,000)
(23,650,000)

New club sales

High-priced sales lost
Cheap sales gained
Total sales

38,250,000
(13,200,000)
3,990,000
29,040,000

New club VC
High-priced VC saved
Cheap club VC
Total VC

Total Sales
Total VC
Fixed costs
Depreciation
EBIT
Taxes
Net income

29,040,000
11,485,000
8,100,000
3,200,000
6,255,000
2,502,000
3,753,000

OCF

6,953,000

(16,830,000)
7,150,000
(1,805,000)
(11,485,000)

Cash flows
t
Cash Flow
0 $ (23,650,000)
1
6,953,000
2
6,953,000
3
6,953,000
4
6,953,000
5
6,953,000
6
6,953,000
7
8,203,000
Payback period
NPV
IRR

3.401
$10,841,563.69
22.64%

Chapter 11
Question 21
Input area:

Project cost
Unit sales
Price per unit
Variable cost per unit
Fixed costs
Lost high price units lost
High price club's price
High price club's VC
Cheap club units gained
Cheap club's price
Cheap club's VC
Marketing study
R&D
Net working capital
Tax rate
Cost of capital
Uncertainty

$
$
$
$
$
$
$
$
$
$
$

22,400,000
51,000
750
330
8,100,000
11,000
1,200
650
9,500
420
190
150,000 Sunk cost
1,000,000 Sunk cost
1,250,000
40%
10%
10%

Output area:

Unit sales (new clubs)

Price (new clubs)
VC (new clubs)
Fixed cost
Sales lost (high-priced)
Sales gained (cheap)
Initial cash outlay
Plant & Equipment
NWC
Total

$
$
$

$
$
$

New club sales

High-priced sales lost
Cheap sales gained
Total sales

New club VC
High-priced VC saved
Cheap club VC
Total VC

Total Sales
Total VC
Fixed costs
Depreciation
EBIT
Taxes
Net income

OCF

Best case
56,100
825
297
7,290,000
9,900
10,450

$
$
$

Worst Case
45,900
675
363
8,910,000
12,100
8,550

(22,400,000)
(1,250,000)
(23,650,000)
Best case
46,282,500 $
(11,880,000)
4,389,000
38,791,500 $

Worst Case
30,982,500
(14,520,000)
3,591,000
20,053,500

(16,661,700) $
6,435,000
(1,985,500)
(12,212,200) $

(16,661,700)
7,865,000
(1,624,500)
(10,421,200)

38,791,500
12,212,200
7,290,000
3,200,000
16,089,300
6,435,720
9,653,580

20,053,500
10,421,200
8,910,000
3,200,000
(2,477,700)
(991,080)
(1,486,620)

12,853,580

1,713,380

Cash flows
t
0 $
1
2
3
4
5
6
7
NPV

Cash Flow
(23,650,000) $
12,853,580
12,853,580
12,853,580
12,853,580
12,853,580
12,853,580
14,103,580
$39,568,058.39

Cash Flow
(23,650,000)
1,713,380
1,713,380
1,713,380
1,713,380
1,713,380
1,713,380
2,963,380
($14,667,100.92)

Chapter 11
Question 22
Input area:

Project cost
Unit sales
Price per unit
Variable cost per unit
Fixed costs
Lost high price units lost
High price club's price
High price club's VC
Cheap club units gained
Cheap club's price
Cheap club's VC
Marketing study
R&D
Net working capital
Tax rate
Cost of capital
New price
New quantity

$
$
$
$
$
$
$
$
$
$
$

22,400,000
51,000
750
330
8,100,000
11,000
1,200
650
9,500
420
190
150,000 Sunk cost
1,000,000 Sunk cost
1,250,000
40%
10%
800
52,000

Output area:

Initial cash outlay

Plant & Equipment
NWC
Total

$
$
$

New club sales

High-priced sales lost
Cheap sales gained
Total sales

New club VC
High-priced VC saved
Cheap club VC
Total VC

Total Sales
Total VC
Fixed costs
Depreciation
EBIT
Taxes
Net income

OCF

(22,400,000)
(1,250,000)
(23,650,000)
DPrice
40,800,000 $
(13,200,000)
3,990,000
31,590,000 $

DQuantity
39,000,000
(13,200,000)
3,990,000
29,790,000

(16,830,000) $
7,150,000
(1,805,000)
(11,485,000) $

(17,160,000)
7,150,000
(1,805,000)
(11,815,000)

31,590,000
11,485,000
8,100,000
3,200,000
8,805,000
3,522,000
5,283,000

29,790,000
11,815,000
8,100,000
3,200,000
6,675,000
2,670,000
4,005,000

8,483,000

7,205,000

Cash flows
t
Cash Flow
Cash Flow
0 $ (23,650,000) $
(23,650,000)
1
8,483,000
7,205,000
2
8,483,000
7,205,000
3
8,483,000
7,205,000
4
8,483,000
7,205,000
5
8,483,000
7,205,000
6
8,483,000
7,205,000
7
9,733,000
8,455,000
NPV
DNPV/DP
DNPV/DQ

$18,290,244.48
$148,973.62

$12,068,405.23
$

1,226.84

Chapter 11
Question 23
Input area:

Additional purchase price

Total annual cost
Hybrid mpg
Sedan mpg
a. Gasoline
Years to keep car

$
$

b. Miles per year

5,450
400
25
23
3.60
6
15,000

c. Interest rate

10%

Output area:

a. Total additional cost

Traditional cost per mile
Hydrid cost per mile
Cost savings per mile
Total miles driven

$
$
$
$

Miles per year

b. Total miles
Cost savings per mile
Price per gallon
c. PV of annual cost
Total discounted cost
Discounted savings

104,485

90,000
0.08722

25.08

$
$
$

1,742.10
7,192.10
574,369.44

Miles driven per year

Discounted savings
Savings needed per mile

7,850
0.156522
0.144000
0.012522
626,910

131,879
$
$

0.47947
0.110091

Price per gallon

31.65

Chapter 11
Question 24
Input area:

Initial cost
Breakeven sales

$ 13,000,000,000
249

b. Promised return

20%

c. Years for sales

10

Output area:

a. Cash flow per plane

52,208,835

b. Cash flow per year

2,600,000,000

Planes per year

c. Cash flow per year
Planes per year

49.80
$3,100,795,839
59.39

Chapter 11
Question 25
Input area:

Quantity
Sales price
Variable cost
Fixed costs
Operating cash flow
Initial investment
Tax rate
Required return
*Depreciation staight-line
over life

85
40,000
20,000
500,000
1,200,000
3,500,000
38%
20%

$
$
$
$
$

Output area:

a. From the tax shield definition of OCF:

OCF = [(P - V)Q - FC](1 - t) + tD
(OCF - tD)/(1 - t) = (P - v)Q - FC
{FC + [(OCF - tD)/(1 - t)]} / (P - v) = Q
b. Depreciation
Cash breakeven
Accounting breakeven
OCF at financial breakeven
Financial breakeven

700,000
25
60
1,170,328.96
98

c. At the accounting breakeven point,

net income = 0, so OCF = NI + D = D
Qa = [FC + [(D - tD) / (1 - t)]} / (P - v)
= (FC + D)/(P - v)
= (FC + OCF)/(P -v)
The tax rate has cancelled out in this case.

Chapter 11
Question 26
Output area:

DOL = %DOCF / %DQ = {[(OCF1 OCF0)/OCF0] / [(Q1 Q0)/Q0]}

OCF1 = [(P v)Q1 FC](1 t) + tD; OCF0 = [(P v)Q1 FC](1 t) + tD;
OCF1 OCF0 = (P v)(1 t)(Q1 Q0)
(OCF1 OCF0)/OCF0 = (P v)( 1 t)(Q1 Q0) / OCF0 ;
[(OCF1 OCF0)/OCF0][(Q1 Q0)/Q0] = [(P v)(1 t)Q0]/OCF0 =
[OCF0 tD + FC(1 t)]/OCF0 ;
DOL = 1 + [FC(1 t) tD]/OCF0

Chapter 11
Question 27
Input area:

Quantity
Initial investment
Project life
Fixed costs
Variable costs
Salvage value
Selling price
Net working capital
Required return
Tax rate
b. Initial cost uncertainty
Salvage value uncertainty
Price uncertainty
NWC uncertainty

$
$
$
$
$
$

35,000
3,200,000
5
450,000
185
500,000
230
360,000
13%
38%
15%
15%
10%
5%

Output area:

a. Depreciation
Aftertax salvage value
OCF
NPV

$
$
$
$

640,000
310,000
940,700.00
112,308.60

Initial cost
Salvage value
Price
NWC
Aftertax salvage value

$
$
$
$
$

Best case
2,720,000
575,000
253
342,000
356,500

Best case OCF

Best case NPV

$
$

1,403,320
2,252,918.79

Worst case OCF

Worst case NPV

$
$

478,080
(2,028,301.58)

b.

$
$
$
$
$

Worst case
3,680,000
425,000
207
378,000
263,500

Chapter 11
Question 28
Input area:

Quantity
Initial investment
Project life
Fixed costs
Variable costs
Salvage value
Selling price
Net working capital
Required return
Tax rate
New quantity

$
$
$
$
$

35,000
3,200,000
5
450,000
185
500,000
230
360,000
13%
38%
36,000

Depreciation
Aftertax salvage value

$
$

640,000
310,000

Units sold
OCF
NPV

$
$

35,000
940,700
112,308.60

Units sold
OCF
NPV

$
$

36,000
968,600
210,439.36

DOCF/DQ
DNPV/DQ

$
$

27.90
98.13

Output area:

You wouldn't want Q to fall below the point where

NPV = 0.
DQ
1,144
Minimum Q
33,856

Chapter 11
Question 29
Input area:

Quantity
Initial investment
Project life
Fixed costs
Variable costs
Salvage value
Selling price
Net working capital
Required return
Tax rate
New quantity

$
$
$
$
$

35,000
3,200,000
5
450,000
185
500,000
230
360,000
13%
38%
36,000

$
$

640,000
310,000

Units sold
OCF
NPV

$
$

35,000
940,700
112,308.60

Units sold
OCF
NPV

$
$

36,000
968,600
210,439.36

DOCF/DQ
DNPV/DQ

$
$

27.90
98.13

Output area:

Depreciation
Aftertax salvage value

Cash breakeven
Accounting breakeven

1,283
24,222

You wouldn't want Q to fall below the point where

NPV = 0.
DQ
1,144
Financial breakeven
33,856

Chapter 11
Question 30
Input area:

Quantity
Initial investment
Project life
Fixed costs
Variable costs
Salvage value
Selling price
Net working capital
Required return
Tax rate
New quantity

$
$
$
$
$

35,000
3,200,000
5
450,000
185
500,000
230
360,000
13%
38%
36,000

$
$

640,000
310,000

Output area:

Depreciation
Aftertax salvage value
DOL
Thus, a 1% rise in Q leads to a
rise in OCF. If Q rises to
then DQ =
so %DOCF =

1.03806
1.03806%
36,000
2.8571%
2.9659%

From #28, DOCF/OCF

If Q rises by
units, then OCF will rise by

2.9659%
1,000
2.9659%