2020/5/13 Assignment Print View

1. Award: 10.00 points

Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $860
per unit; variable cost = $320 per unit; fixed costs = $3.4 million; quantity = 60,000 units. Suppose the
company believes all of its estimates are accurate only to within ± 15 percent.

Required:
What values should the company use for the four variables given here when it performs its best-case and
worst-case scenario analysis? (Do not round intermediate calculations. Enter your answers in dollars,
not millions of dollars. Round your answers to the nearest whole dollar amount (e.g.,1,234,567).)
Scenario Unit Sales Unit Price Unit Variable Cost Fixed Costs
Base case 60,000 $ 860 $ 320 $ 3,400,000
Best case
Worst case

References

Worksheet Difficulty: Basic Learning Objective: 09-03 Evaluate an

estimated NPV.

2. Award: 10.00 points

Winnebagel Corp. currently sells 28,000 motor homes per year at $73,000 each and 7,000 luxury motor
coaches per year at $115,000 each. The company wants to introduce a new portable camper to fill out its
product line; it hopes to sell 29,000 of these campers per year at $18,500 each. An independent consultant
has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing
motor homes by 2,500 units per year and reduce the sales of its motor coaches by 750 units per year.

Required:
What is the amount to use as the annual sales figure when evaluating this project? (Do not round
intermediate calculations.)

Net sales $

References

Worksheet Difficulty: Basic Learning Objective: 09-01 Determine the

relevant cash flows for a proposed
investment.

3. Award: 10.00 points

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2020/5/13 Assignment Print View

The Green Tomato purchased a parcel of land six years ago for $299,500. At that time, the firm
invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the
site itself at that time, it decided to lease the land for $28,000 a year. The Green Tomato is now
considering building a hotel on the site as the rental lease is expiring. The current value of the land
is $355,000. The firm has no loans or mortgages secured by the property. What value should be
included in the initial cost of the hotel project for the use of this land?

 $363,500

 $355,000

 $419,000

 $0

 $299,500

References

Multiple Choice Difficulty: Easy Learning Objective: 09-01 Determine the

relevant cash flows for a proposed
investment.

4. Award: 10.00 points

Sensitivity analysis:

 looks at the most reasonably optimistic and pessimistic results for a project.

 helps identify the variable within a project that presents the greatest forecasting risk.

 is used for projects that cannot be analyzed by scenario analysis because the cash flows
are unconventional.

 illustrates how an increase in operating cash flow caused by changing both the revenue
and the costs simultaneously will change the net present value for a project.

 is generally conducted prior to scenario analysis just to determine if the range of potential
outcomes is acceptable.

References

Multiple Choice Difficulty: Easy Learning Objective: 09-03 Evaluate an

estimated NPV.

5. Award: 10.00 points

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2020/5/13 Assignment Print View
Consider an asset that costs $635,000 and is depreciated straight-line to zero over its eight-year tax life.
The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $125,000.

Required:
If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not
round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Aftertax salvage value $

References

Worksheet Difficulty: Basic Learning Objective: 09-02 Analyze a

project’s projected cash flows.

6. Award: 10.00 points

Scenario analysis:

 determines the absolute worst and absolute best outcome that could ever occur.

 evaluates a project's net present value while sensitivity analysis evaluates a project's
internal rate of return.

 helps determine the reasonable range of expectations for a project's anticipated outcome.

 determines which variable has the greatest impact on a project's net present value.

 determines the impact a $1 change in sales has on the internal rate of return.

References

Multiple Choice Difficulty: Easy Learning Objective: 09-03 Evaluate an

estimated NPV.

7. Award: 10.00 points

Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some
land six years ago for $7.5 million in anticipation of using it as a warehouse and distribution site, but the
company has since decided to rent facilities elsewhere. The land would net $10.3 million if it were sold
today. The company now wants to build its new manufacturing plant on this land; the plant will cost $24
million to build, and the site requires $975,000 worth of grading before it is suitable for construction.

Required:
What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this
project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars
(e.g., 1,234,567).)

Cash flow
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2020/5/13 Assignment Print View

References

Worksheet Difficulty: Basic Learning Objective: 09-01 Determine the

relevant cash flows for a proposed
investment.

8. Award: 10.00 points

We are evaluating a project that costs $1,675,000, has a six-year life, and has no salvage value. Assume
that depreciation is straight-line to zero over the life of the project. Sales are projected at 91,000 units per
year. Price per unit is $35.95, variable cost per unit is $21.40, and fixed costs are $775,000 per year. The
tax rate is 35 percent, and we require a return of 11 percent on this project.

Requirement 1:
Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your
answers to 2 decimal places (e.g., 32.16).)

Base-case cash flow $

NPV $

Requirement 2:
What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations.
Round your answer to 3 decimal places (e.g., 32.161).)

Sensitivity of NPV $

Requirement 3:
If there is a 500-unit decrease in projected sales, how much would the NPV drop? (Do not round
intermediate calculations. Input your answer as a positive value. Round your answer to 2 decimal
places (e.g., 32.16).)

NPV drop $

Requirement 4:
What is the sensitivity of OCF to changes in the variable cost figure? (Do not round intermediate
calculations. A negative amount should be indicated by a minus sign. Round your answer to 2
decimal places (e.g., 32.16).)

Sensitivity of OCF $

Requirement 5:
If there is a $1 decrease in estimated variable costs, how much would the increase in OCF be? (Do not
round intermediate calculations. Round your answer to the nearest whole dollar amount (e.g.,
1,234,567).)

Increase in OCF $

References

Worksheet Difficulty: Basic Learning Objective: 09-03 Evaluate an

estimated NPV.

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2020/5/13 Assignment Print View

9. Award: 10.00 points

Rolston Music Company is considering the sale of a new sound board used in recording studios. The new
board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently sells
1,850 units of its existing model per year. If the new model is introduced, sales of the existing model will fall
to 1,520 units per year. The old board retails for $22,300. Variable costs are 55 percent of sales,
depreciation on the equipment to produce the new board will be $1,975,000 per year, and fixed costs are
$2,400,000 per year.

Required:
If the tax rate is 38 percent, what is the annual OCF for the project? (Do not round intermediate
calculations. Round your answer to the nearest whole dollar amount (e.g., 1,234,567).)

OCF $

References

Worksheet Difficulty: Basic Learning Objective: 09-02 Analyze a

project’s projected cash flows.

10. Award: 10.00 points

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset
investment of $1,860,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life,
after which time it will be worthless. The project is estimated to generate $1,950,000 in annual sales, with
costs of $1,060,000. Assume the tax rate is 35 percent and the required return on the project is 14 percent.

Required:
What is the project’s NPV? (Do not round intermediate calculations. Negative amount should be
indicated by a minus sign. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).
Round your answer to 2 decimal places (e.g., 32.16).)

Net present value $

References

Worksheet Difficulty: Basic Learning Objective: 09-02 Analyze a

project’s projected cash flows.

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