a.

Tax rate 22%

Depreciation $105,625 105,625 Require return 10%
Book break-even is: 41,612 $0 VC $17
FC $685,000
b. P $36
OCF $304,038 Sales 55,000 per year units
NPV $777,017.62 NPER 8
CostOfProject ($845,000)
OCF $259,578 ∆Quantity 52000
NPV $539,826.81 ∆VC $28
∆NPV/∆S $79.064
Sales drop (-500) units $39,531.80

c.
OCF ($167,863)
∆OCF/∆var ($42,900)
The quantity sold OCF NPV ∆NPV/∆S
$304,038 $777,017.62
40000
45000 $79.064 per unit
50000 #VALUE!
55000 #VALUE!
60000 #VALUE!
65000 #VALUE!
70000 #VALUE!
75000 #VALUE!
80000 #VALUE!
85000 #VALUE!
90000 #VALUE!
95000 #VALUE!
100000 #VALUE!

Variable Cost OCF ∆OCF/∆var

$304,038
$17
$18 -$42,900 If variable costs decrease by $1 then OCF wo
$19 #VALUE!
$20 #VALUE!
$21 #VALUE!
$22 #VALUE!
$23 #VALUE!
$24 #VALUE!
$25 #VALUE!
$26 #VALUE!
$27 #VALUE!
$28 #VALUE!
$29 #VALUE!
$30 #VALUE!
ecrease by $1 then OCF would increase by $43,450
Accounting Break­Even Unit Price Unit Variable Cost Fixed Costs Depreciation
$143,286 $39 $30 $820,000 $469,574
$104,300 Negative $27 $2,320,000 $975,000
$26,640 $92 $78.27 $237,000 $128,700
Tax rate 24%
Discount rate 12%
VC $6
FC $310,000
P $19
Machine Cost $485,000
NPER 5

EAC $134,543.72 $485,000

Depreciation $97,000
FIN break-even $35,108 $134,543.72 $0
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$304,389.48 $365,500.59 $400,480.01 $412,863.80 $405,807.51 $382,123.21 $145,809.60
($2,950,000) ($2,635,000) ($2,320,000) ($2,005,000) ($1,690,000) ($1,375,000) ($1,375,000)
Machine Cost $2,950,000
Require return 8%
Increased cash flows $485,000
NPER 10
The machine will decline by ($315,000) per year until it reaches $1.375 million

$412,863.80
Wait until Year 3 and buy machine or Year 2 ~ 4
P $45 The accounting break-even point is: 17,914.83 $135,000
VC $10.95 The financial break-even point is : 21,340.19 $227,140.54
FC $475,000
Depreciation $135,000
Tax rate 21%
NPER 7
Discount rate 15%
Investment ($945,000)
EAC $227,140.54 $945,000
$0
$0
Sales $71 The financial break-even point is : 9,805.98 $120,219.10 $0
VC $28
FC $295,000
Depreciation $96,000
Tax rate 21%
NPER 5
Discount rate 8%
Investment ($480,000)
EAC $120,219.10 $480,000
NPER 4 Quantity sold OCF ∆OCF/∆qua
Tax rate 21% $419,117.50
VC $16 61,000
FC $245,000 62,000 $9.48 per unit
P $28 63,000 #VALUE!
Q 61,000 per year units 64,000 #VALUE!
investment ($655,000) 65,000 #VALUE!
OCF $419,117.50 66,000 #VALUE!
67,000 #VALUE!
68,000 #VALUE!
69,000 #VALUE!
70,000 #VALUE!
71,000 #VALUE!
Tax rate 21% Fixed Cost OCF NPV
Require return 12% $716,382.50 $500,903.92
VC $9,400 $550,000
FC $550,000 $551,000
P $16,300 $552,000
Sales 195 per year units $553,000
investment ($1,675,000) $554,000
NPER 4 $555,000
OCF $716,382.50 $556,000
NPV $500,903.92 $557,000
$558,000
Book break-even 140.40 units $559,000
$560,000
$561,000
$562,000
$563,000
$564,000
$565,000
$566,000
$567,000
$568,000
$569,000
$570,000
∆NPV/∆Cfix ∆OCF/∆Cfix

-2.400 -0.79
#VALUE! #VALUE!
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Sales Price Q
New clubs $815 55000
Exp. clubs $1,345 -10000
Cheap clubs $445 12000
$36,715,000

Var. costs Price Q

New clubs ($365) 55000
Exp. clubs ($730) -10000
Cheap clubs ($210) 10000
($14,875,000)

Sales $36,715,000 ($41,050,000)

Variable costs $14,875,000 $10,692,500
Fixed costs $9,450,000 $10,692,500
Depreciation $5,600,000 $10,692,500
EBT $6,790,000 $10,692,500
Taxes $1,697,500 $10,692,500
Net income $5,092,500 $10,692,500
OCF $10,692,500 $12,542,500

Payback period 3.839 years

NPV $11,954,910.73 $11,954,910.73
IRR 18.24%

Base Case Best Case Worst Case

Unit sales (new) 55000 60500 49500
Price (new) $815 $897 $734
VC (new) $365 $329 $402
Fixed costs $9,450,000 $8,505,000 $10,395,000
Sales lost (expensive) -10,000 -9,000 -11,000
Sales gained (cheap) 12,000 13,200 10,800
OCF $10,692,500 $18,969,500 $2,759,000
NPV $11,954,910.73 $52,250,813.28 ($26,668,689.96)

The Best-Case
Sales Price Q
New clubs $897 60500
Exp. clubs $1,345 -9,000
Cheap clubs $445 13,200
$48,007,250

Var. costs Price Q

New clubs ($329) 60500
Exp. clubs ($730) -9,000
Cheap clubs ($210) 13,200
($16,076,250)

The Worst-Case
Sales Price Q
New clubs $734 49500
Exp. clubs $1,345 -11,000
Cheap clubs $445 10,800
$26,319,250

Var. costs Price Q

New clubs ($402) 49500
Exp. clubs ($730) -11,000
Cheap clubs ($210) 10,800
($14,112,250)
Tax rate 25%
Cost of capital 10%
Initial investment ($39,200,000)
Initial investment NWC ($1,850,000)
Total cost ($41,050,000)
NPER 7
FC $9,450,000

Units sold (new) OCF NPV ∆NPV/∆qua ∆OCF/∆qua

$10,692,500 $11,954,910.73
55,000
56,000 $2,975.82 $611.25
57,000 #VALUE! #VALUE!
58,000 #VALUE! #VALUE!
59,000 #VALUE! #VALUE!
60,000 #VALUE! #VALUE!
61,000 #VALUE! #VALUE!
62,000 #VALUE! #VALUE!
63,000 #VALUE! #VALUE!
64,000 #VALUE! #VALUE!
65,000 #VALUE! #VALUE!
66,000 #VALUE! #VALUE!
67,000 #VALUE! #VALUE!
68,000 #VALUE! #VALUE!
69,000 #VALUE! #VALUE!
70,000 #VALUE! #VALUE!
71,000 #VALUE! #VALUE!
72,000 #VALUE! #VALUE!
73,000 #VALUE! #VALUE!
74,000 #VALUE! #VALUE!
75,000 #VALUE! #VALUE!
76,000 #VALUE! #VALUE!
77,000 #VALUE! #VALUE!
78,000 #VALUE! #VALUE!
79,000 #VALUE! #VALUE!
80,000 #VALUE! #VALUE!
81,000 #VALUE! #VALUE!
82,000 #VALUE! #VALUE!
83,000 #VALUE! #VALUE!
84,000 #VALUE! #VALUE!
85,000 #VALUE! #VALUE!
Price (new) OCF NPV ∆NPV/∆pric ∆OCF/∆pric
$10,692,500 $11,954,910.73
$815
$820 $200,822.28 $41,250
$825 #VALUE! #VALUE!
$830 #VALUE! #VALUE!
$835 #VALUE! #VALUE!
$840 #VALUE! #VALUE!
$845 #VALUE! #VALUE!
$850 #VALUE! #VALUE!
$855 #VALUE! #VALUE!
$860 #VALUE! #VALUE!
$865 #VALUE! #VALUE!
$870 #VALUE! #VALUE!
$875 #VALUE! #VALUE!
$880 #VALUE! #VALUE!
$885 #VALUE! #VALUE!
$890 #VALUE! #VALUE!
$895 #VALUE! #VALUE!
$900 #VALUE! #VALUE!
$905 #VALUE! #VALUE!
$910 #VALUE! #VALUE!
$915 #VALUE! #VALUE!
$920 #VALUE! #VALUE!
$925 #VALUE! #VALUE!
$930 #VALUE! #VALUE!
$935 #VALUE! #VALUE!
$940 #VALUE! #VALUE!
$945 #VALUE! #VALUE!
$950 #VALUE! #VALUE!
$955 #VALUE! #VALUE!
$960 #VALUE! #VALUE!
$965 #VALUE! #VALUE!
OCF $436,600
Discount rate 14%
Initial investment ($1,900,000)
NPER 10
Price $59
Q 7400
Abandonment Value $1,100,000 After the first year
a.
NPV $377,356.09
b.
Q 3,769.24 Financial Break-Even
OCF $222,385.22
NPV $0

Q (Expansion) 11400 Expected sales will be revised upward to units if the first year is a succes
Q (Abandonment) 3500 Expected sales will be revised upward to units if the first year is a succes
a.
PV future CFs $3,326,929.70
Expected value of project at Year 1 $2,650,064.85
NPV $424,618.29

b.
PV future CFs $1,021,425.78
Gain from option to abandon $78,574.22
Option value $34,462.38

Projected sales 22800 Will be after expansion

PV future CFs $6,653,859.39
Expected value of project at Year 1 $4,313,529.70
NPV $1,883,797.98
Gain from option to expand $3,326,929.70
Option value $1,459,179.69
d to units if the first year is a success
d to units if the first year is a success
a. The accounting break-even point is: 726.53 units Tax rate
b. The financial break-even point is : 1,075.56 units Initial investment
Discount rate
Price
VC
NPER
The initial investment is :
EAC
 21%
($8,900) Depreciation Bonus
12%
$16
$3.75
3
($25,000) in licensing fees
$10,408.72
The remaining life of the mine is: 8 years Require return 12%
OCF $4,407,500 The initial investment is : ($18,200,000)
NPV $3,694,872.27 S0 $1,025
OCF_Up $5,805,000 S1 $1,350
OCF_Down $4,042,000 S1 $940
PVA_Up OCF $28,837,148.85 Q 4300
PVA_Down OCF $20,079,199.94
The NPV is one year will be: $7,133,969.28
NPV today $6,369,615.43
Option value $2,674,743.16
 S0 SpotPrice
S1 FuturePrice

There is a 60 percent probability

There is a 40 percent probability
a. NPV $6,441,079.98 Discount rate 13%
b. OCF_Break-Even $4,676,853.65 The initial investment is : ($31,000,000)
NPER 10
OCF $6,900,000
Abandonment value $24,000,000
After the first year
OCF $3,900,000 Discount rate 11%
Base-case NPV ($86,001.63) Initial investment ($14,500,000)
New OCF $5,850,000 Q0 20
NPV $1,873,561.84 Price $195,000
NPER 5
Aftertax salvage value $10,400,000
Q1 30
Q1 0
units per year

after the first year

Also, after the first year with equal probability
Also, after the first year with equal probability
 Pessimistic Expected Optimistic Tax rate 21%
Market size 90,000 100,000 112,000 Require return 13%
Market share 20% 23% 25% NPER 6
Selling price $ 149 $ 153 $ 157
Variable costs per unit $ 82 $ 78 $ 75

Fixed costs per year $ 980,000 $ 925,000 $ 885,000

Initial investment $2,200,000 $2,050,000 $1,950,000

Depreciation $366,667 $341,667 $325,000
Sales (units per year) 18,000 23,000 28,000

OCF $255,540 $703,750 $1,182,940

NPV ($1,178,466.13) $763,275.66 $2,778,861.55
 The Base-Case The Best-Case The Worst-Case
Project to supply (tons) 20,000 Project to supply (tons) 20,000 Project to supply (tons)

Selling price per ton $ 295 Selling price per ton $ 325 Selling price per ton
Variable costs per ton $ 185 Variable costs per ton $ 185 Variable costs per ton

Fixed costs per year $ 925,000 Fixed costs per year $ 925,000 Fixed costs per year
Initial investment -$3,100,000 Initial investment -$2,635,000 Initial investment
Depreciation $620,000 Depreciation $620,000 Depreciation
NWC -$380,000 NWC -$361,000 NWC
Aftertax Salvage value 312,000 Aftertax Salvage value 358,800 Aftertax Salvage value

OCF $1,130,900 OCF $1,591,100 OCF

NPV $873,226.71 NPV $2,990,945.26 NPV
The Worst-Case Tax rate 22% Quantity supplied OCF NPV
20,000
Require return 13% $1,130,900 $873,226.71
$ 266 NPER 5 20000
$ 185
Salvage value $400,000 21000
$ 925,000 ∆Q 2,893.60 units 22000
-$3,565,000 Q_min 17,106 units 23000
$620,000 24000
-$399,000 25000
265,200
26000
$670,700 27000
($1,244,491.84) 28000
29000
30000
31000
32000
33000
34000
35000
36000
37000
38000
39000
40000
∆OCF/∆qua ∆NPV/∆qua

$85.80 $301.78 $873,226.71

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Year Market Value ($ millions) if we abandon the CFO after period: After- tax Salvage value Book Value

1 8,100,000 14,085,000 8,289,000 9,000,000

2 6,200,000 11,954,000 6,158,000 6,000,000
3 4,800,000 10,218,000 4,422,000 3,000,000
4 0
 NPV
Tax rate 21%
-435,398.23 Initial investment ($12,000,000)
794,478.82 Discount rate 13%
2,348,616.08 NWC ($900,000)
Revenue annualy $9,100,000
Operating costs $3,700,000
NPER 4

OCF $4,896,000
NPV $2,214,998
Initial investment ($8,900,000)
Discount rate 10%
OCF $1,600,000
NPER 10
NPV $931,307.37

Abandonment Value $2,900,000

OCF_1 $2,810,000 #Case 1 After one year
OCF_1 $385,000 #Case 2 After one year
PVA of downward revision $2,217,224.17 Each revision has an equal probability of occurring
PVA of upward revision $16,182,856.92 Each revision has an equal probability of occurring
NPV $1,228,571.33
 1-10 Years Book Value

Save Pretax operating expenses annualy $13,000

The annual depreciation for the old harvester is: 4,333.33 43,333.33
The aftertax salvage value of the old harvester will be: 25,913.33
The aftertax present value of the cash flows savings as: 50,890.31
NPV $0.00
Tax rate 22%
Require return 15%
Market Value of old harvester $65,000 NPER 15
Market Value of old harvester $21,000 NPER 5

The break-even
purchase price
of the new harvester is : $80,957.88