1.

The Yellow Shelf Company sells all of its shelves for $100 per shelf, and incurs $50

in variable costs to produce each. If the fixed costs for the firm are $2,000,000 per

year, what will the EBIT for the firm be if it produces and sells 45,000 shelves next

year? Assume that depreciation and amortization is included in the fixed costs.

2. Hydrogen Batteries sells its specialty automobile batteries for $85 each, while its

current variable cost per unit is $65. Total fixed costs (including depreciation and

amortization expense) are $150,000 per year. Management expects to sell 10,000

batteries next year, but is concerned that its variable cost will increase next year due

to material cost increases. What is the maximum variable cost per unit increase that

will keep the EBIT from becoming negative?

3. EBIT: The Generic Publications Text Book Company sells all of its books for $100

per book, and it currently costs $50 in variable costs to produce each text. The fixed

costs, which include depreciation and amortization for the firm, are currently $2

million per year. The firm is considering changing its production technology, which

will increase the fixed costs for the firm by 50 percent but decrease the variable costs

per unit by 50 percent. If 45,000 books are expected to be sold next year, should the

firm switch technologies?

4. EBIT: WalkAbout Kangaroo Shoe Stores forecasts that it will sell 9,500 pairs of

shoes next year. The firm buys its shoes for $50 per pair from the wholesaler and sells

them for $75 per pair. If the firm will incur fixed costs plus depreciation and

amortization of $100,000, then what is the percentage increase in EBIT if the actual

sales next year equal 11,500 pairs of shoes instead of 9,500?

5. Scenario analysis: Chip’s Home Brew Whiskey forecasts that if the firm sells each

bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles

per year, whereas sales will be 90 percent as high if the price is raised 10 percent.

Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is

$100,000. Depreciation and amortization charges are $20,000, and the firm has a 30

percent marginal tax rate. Management anticipates an increased working capital need

of $3,000 for the year. What will be the effect of a price increase on the firm’s FCF

for the year?

6. Profitability index: Suppose that you could invest in the following projects but had

only $30,000 to invest. How would you make your decision and which projects would

you invest in?

Project Cost ($) NPV ($)

A $ 8,000 $4,000

B 11,000 7,000

C 9,000 5,000

D 7,000 4,000

7. You are analyzing two proposed capital investments with the following cash flows:

Year Project X ($) Project Y ($)

0 $(20,000) $(20,000)
1 13,000 7,000
2 6,000 7,000
3 6,000 7,000
4 2,000 7,000
 The cost of capital for both projects is 10 percent. Calculate the profitability index

(PI) for each project. Which project, or projects, should be accepted if you have

unlimited funds to invest? Which project should be accepted if they are mutually

exclusive?

8. Steven’s Hats forecasts that it will sell 25,000 baseball caps next year. The firm buys

its caps for $3 from the wholesaler and sells them for $15 each. If the firm will incur

fixed costs plus depreciation and amortization of $80,000, then what is the percent

increase in EBIT if the actual sales next year equal 27,000 caps?

9. Capital rationing. Mick's Pub's is considering expanding the number of restaurants it

owns. If it decides on the expansion, it will invest $2,300,000, and the NPV of the

project is $900,000. What is the profitability index of the project?

10. Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you

take the project, it will produce net cash flows of $300,000 per year for the next six years. If

the appropriate discount rate for the project is 10 percent, what is the profitability index of the

project?