A project currently generates sales of $12 million, variable costs equal to 60% of sales, and fixed costs of $2 million. The firmâs tax rate is 50%. The project will last for 10 years. The discount rate is 12%.
a-1. What is the effect on project NPV, if sales increase from $12 million to $12.8 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
a-2. What is the effect on project NPV, if variable costs increase to 70% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.)
b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.)
c. How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
A project currently generates sales of $12 million, variable costs equal to 60% of sales, and fixed costs of $2 million. The firmâs tax rate is 50%. The project will last for 10 years. The discount rate is 12%.
a-1. What is the effect on project NPV, if sales increase from $12 million to $12.8 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
a-2. What is the effect on project NPV, if variable costs increase to 70% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.)
b. If project NPV under the base-case scenario is $2 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.)
c. How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Related questions
| A project currently generates sales of $11.5 million, variable costs equal to 40% of sales, and fixed costs of $3.4 million. The firmâs tax rate is 40%. |
| The project will last for 10 years. The discount rate is 12%. |
| a-1. | What is the effect on project NPV, if sales increase from $11.5 million to $13.5 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) |
| Change in cash flow | $ million |
| a-2. | What is the effect on project NPV, if variable costs increase to 60% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.) |
| Change in cash flow | $ million |
| b. | If project NPV under the base-case scenario is $3.4 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.) |
| Increase in fixed cost | $ |
| c. | How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| Increase in fixed cost | $ million |
| A project currently generates sales of $11.5 million, variable costs equal to 40% of sales, and fixed costs of $3.4 million. The firmâs tax rate is 40%. |
| The project will last for 10 years. The discount rate is 12%. |
| a-1. | What is the effect on project NPV, if sales increase from $11.5 million to $13.5 million? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) |
| Change in cash flow | $ million |
| a-2. | What is the effect on project NPV, if variable costs increase to 60% of sales? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. Enter your answer as the absolute value of the change.) |
| Change in cash flow | $ million |
| b. | If project NPV under the base-case scenario is $3.4 million, how much can fixed costs increase before NPV turns negative? (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round you answer to the nearest dollar amount.) |
| Increase in fixed cost | $ |
| c. | How much can fixed costs increase before accounting profits turn negative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| Increase in fixed cost | $ million |
| Emperorâs Clothes Fashions can invest $6 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 7 million jars of makeup a year. Fixed costs are $3.2 million a year, and variable costs are $2.80 per jar. The product will be priced at $4.10 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 12%, and the tax rate is 30%. |
| a. | What is project NPV under these base-case assumptions? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| b. | What is NPV if variable costs turn out to be $3.10 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| c. | What is NPV if fixed costs turn out to be $3 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| d. | At what price per jar would project NPV equal zero? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price | $ per jar |
