Brealey Principles 12e

Pr 10-9

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Project C0 C1 C2 C3 C4
F -10000 7000 6000 5000 0
G -10000 2000 2000 2000 2000

Cost of capital .10

Percent overstated .07
Discount rate .17

Solution and Explanation:

a.
True NPV F $4,023.37
True NPV G $8,600.00

b.
NPV F @ discount rate $3,487.84
NPV g @ discount rate $1,764.71

Notes:
Do not include part c explanation in Connect.
w algo versions.

C5 etc.
0…
2000 …
Brealey Principles 12e
Pr 10-10

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:

Initial investment -$16.2 billion

Market size $1.22 million
Market share .10
Unit price 520,000 ¥
Unit variable cost 480,000 ¥
Fixed cost 2.12 billion ¥
Depreciation 1.62 billion ¥
Tax rate .50
Discount rate .12
Years 10

Solution and Explanation:

(¥ in billions) Year 0 Year 1
Investment -16.2
Revenue 63.440
Variable cost 58.560
Fixed cost 2.120
Depreciation 1.620
Pretax profit 1.140
Tax .570
Net profit .570
Operating cash flow 2.190

Net cash flow -$16.2 2.190

NPV -3.826 B
algo versions.
Brealey Principles 12e
Pr 10-12

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:

Initial investment -21 billion ¥ (input as a negative)

Discount rate .17
Market size 1.4 million ¥
Market share .10
Unit price 465,000
Unit variable cost 390,000
Fixed cost 3.0 billion ¥
Depreciation 4.2 billion ¥
Tax rate .50
Years 10
Additional investment -21 billion ¥ (input as a negative)
Variable cost reduction per unit -58,000 ¥ (input as a negative)

Solution and Explanation:

a.
(¥ in billions) Year 0 Year 1
Investment -42
Revenue 65.100
Variable cost 46.480
Fixed cost 3.000
Depreciation 4.200
Pretax profit 11.420
Tax 5.710
Net profit 5.710
Operating cash flow 9.910

Net cash flow -42 9.910

PVIFA 4.658603628
NPV 4.167 billion

b.
Breakeven quantity 126,550
c.
The break-even point is the point where the present value of the cash flows, including the opportunity cost of

d.
Revenue 65.10
Fixed cost 3.00
Depreciation 2.10
Tax rate .50
Variable cost at profit = 0 60 billion
Variable cost per unit 428,571

EACF 4.5078
Variable cost at NPV = 0 55.18
Variable cost per unit 394,174

e.
DOL 1.63
view algo versions.

(input as a negative)

(input as a negative)
(input as a negative)

ck: NPV = 0
including the opportunity cost of capital, yields a zero NPV.
Brealey Principles 12e
Pr 10-13

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Initial investment $90,000
Years 10
Annual sales $100,000
Variable cost percent .50
Fixed costs $30,000
Tax rate .30
Cost of capital .10

Solution and Explanation:

a.
Sales $100,000
Variable costs 50,000
Fixed costs 30,000
Depreciation 9,000
Pretax income $11,000
Taxes 3,300
Net income $7,700

Operating cash flow $16,700

FC accounting B/E $41,000 Sales - VC - D = FC

FC NPV B/E:
OCF $14,647.09
Net income $5,647.09
Pretax income $8,067.27
FC $32,932.73

b.
Pretax income $11,000.00
Net income $5,647.09
Tax rate 48.66%

c.
Change in tax rate No effect
view algo versions.
Brealey Principles 12e
Pr 10-14

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:

Pessimistic Expected Optimistic

Sales .40 .50 .70
MC 6 4 3
Life 7 10 13

Cost 9 million
Discount rate .12
Current cost 8

Solution and Explanation:

Cost savings: Expected sales
EAC -$1,592,857
Manufacturing cost $2,000,000
EAC savings $407,143
EAC savings in millions .41

Equivalend Annual Cost Savings (Millions)

Pessimistic Expected Optimistic
Sales .01 .41 1.21
Manufacturing cost -.59 .41 .91
Economic life .03 .41 .60
view algo versions.
Brealey Principles 12e
Pr 10-23

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Phase III Results Prob. 1 Prob. 2
Upside $1,000 80% 75%
Most likely $300 80% 75%
Downside $100 80% 75%
Cost of capital 9.60%
Phase III years 3
Phase III investment $130
Outcome Probability .25
Outcome Probability .50
Outcome Probability .25
Phase II years 2
Probablity of success 44%
Revised investment $38

Solution and Explanation:

NPV at 80% success:
Upside $478 $478
Most likely $52 $52
Downside -$69 $0

Weighted NPV $146

NPV $15.32 million

NPV at 75% success:

Upside $440 $440
Most likely $41 $41
Downside -$73 $0

Weighted NPV $130

NPV $9.75 million
w algo versions.