This is some tutorial answer for chapter 11 and 18 that I managed to get and probably it can help

your revision.

CHAPTER 11

1. a. The total variable cost per unit is the sum of the two variable costs, so:

Total variable costs per unit = $5.43 + 3.13

Total variable costs per unit = $8.56

b. The total costs include all variable costs and fixed costs. We need to make sure we are
including all variable costs for the number of units produced, so:

Total costs = Variable costs + Fixed costs

Total costs = $8.56(280,000) + $720,000
Total costs = $3,116,800

c. The cash breakeven, that is the point where cash flow is zero, is:

QC = $720,000 / ($19.99 – 8.56)

QC = 62,992.13 units

And the accounting breakeven is:

QA = ($720,000 + 220,000) / ($19.99 – 8.56)

QA = 82,239.72 units

3. The base-case, best-case, and worst-case values are shown below. Remember that in the best-case,
sales and price increase, while costs decrease. In the worst-case, sales and price decrease, and costs
increase.
Unit
Scenario Unit Sales Unit Price Variable Cost Fixed Costs
Base 95,000 $1,900.00 $240.00 $4,800,000
Best 109,250 $2,185.00 $204.00 $4,080,000
Worst 80,750 $1,615.00 $276.00 $5,520,000

4. An estimate for the impact of changes in price on the profitability of the project can be found from
the sensitivity of NPV with respect to price: ∆ NPV/∆ P. This measure can be calculated by finding
the NPV at any two different price levels and forming the ratio of the changes in these parameters.
Whenever a sensitivity analysis is performed, all other variables are held constant at their base-case
values.

5. a. To calculate the accounting breakeven, we first need to find the depreciation for each year. The
depreciation is:

Depreciation = $724,000/8
Depreciation = $90,500 per year

And the accounting breakeven is:

 QA = ($780,000 + 90,500)/($43 – 29)
QA = 62,179 units

To calculate the accounting breakeven, we must realize at this point (and only this point), the
OCF is equal to depreciation. So, the DOL at the accounting breakeven is:

DOL = 1 + FC/OCF = 1 + FC/D

DOL = 1 + [$780,000/$90,500]
DOL = 9.919

b. We will use the tax shield approach to calculate the OCF. The OCF is:

OCFbase = [(P – v)Q – FC](1 – tc) + tcD

OCFbase = [($43 – 29)(90,000) – $780,000](0.65) + 0.35($90,500)
OCFbase = $343,675

Now we can calculate the NPV using our base-case projections. There is no salvage value or
NWC, so the NPV is:

NPVbase = –$724,000 + $343,675(PVIFA15%,8)

NPVbase = $818,180.22

To calculate the sensitivity of the NPV to changes in the quantity sold, we will calculate the
NPV at a different quantity. We will use sales of 95,000 units. The NPV at this sales level is:

OCFnew = [($43 – 29)(95,000) – $780,000](0.65) + 0.35($90,500)

OCFnew = $389,175

And the NPV is:

NPVnew = –$724,000 + $389,175(PVIFA15%,8)

NPVnew = $1,022,353.35

So, the change in NPV for every unit change in sales is:

∆ NPV/∆ S = ($1,022,353.35 – 818,180.22)/(95,000 – 90,000)

∆ NPV/∆ S = +$40.835

If sales were to drop by 500 units, then NPV would drop by:

NPV drop = $40.835(500) = $20,417.31

You may wonder why we chose 95,000 units. Because it doesn’t matter! Whatever sales
number we use, when we calculate the change in NPV per unit sold, the ratio will be the same.

c. To find out how sensitive OCF is to a change in variable costs, we will compute the OCF at a
variable cost of $30. Again, the number we choose to use here is irrelevant: We will get the
same ratio of OCF to a one dollar change in variable cost no matter what variable cost we use.
So, using the tax shield approach, the OCF at a variable cost of $30 is:
 OCFnew = [($43 – 30)(90,000) – 780,000](0.65) + 0.35($90,500)
OCFnew = $285,175

So, the change in OCF for a $1 change in variable costs is:

∆ OCF/∆ v = ($285,175,450 – 343,675)/($30 – 29)

∆ OCF/∆ v = –$58,500

If variable costs decrease by $1 then, OCF would increase by $58,500

6. We will use the tax shield approach to calculate the OCF for the best- and worst-case scenarios. For
the best-case scenario, the price and quantity increase by 10 percent, so we will multiply the base
case numbers by 1.1, a 10 percent increase. The variable and fixed costs both decrease by 10 percent,
so we will multiply the base case numbers by .9, a 10 percent decrease. Doing so, we get:

OCFbest = {[($43)(1.1) – ($29)(0.9)](90,000)(1.1) – $780,000(0.9)}(0.65) + 0.35($90,500)

OCFbest = $939,595

The best-case NPV is:

NPVbest = –$724,000 + $939,595(PVIFA15%,8)

NPVbest = $3,492,264.85

For the worst-case scenario, the price and quantity decrease by 10 percent, so we will multiply the
base case numbers by .9, a 10 percent decrease. The variable and fixed costs both increase by 10
percent, so we will multiply the base case numbers by 1.1, a 10 percent increase. Doing so, we get:

OCFworst = {[($43)(0.9) – ($29)(1.1)](90,000)(0.9) – $780,000(1.1)}(0.65) + 0.35($90,500)

OCFworst = –$168,005

The worst-case NPV is:

NPVworst = –$724,000 – $168,005(PVIFA15%,8)

NPVworst = –$1,477,892.45
 CHAPTER 18

5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:

(90 – 45)/90 = 1/2 of current sales are collected. So:

Q1 Q2 Q3 Q4
Beginning receivables $360.00 $395.00 $370.00 $435.00
Sales 790.00 740.00 870.00 950.00
Cash collections (755.00) (765.00) (805.00) (910.00)
Ending receivables $395.00 $370.00 $435.00 $475.00

b. A 60-day collection period implies all receivables outstanding from previous quarter are
collected in the current quarter, and:

(90-60)/90 = 1/3 of current sales are collected. So:

Q1 Q2 Q3 Q4
Beginning receivables $360.00 $526.67 $493.33 $580.00
Sales 790.00 740.00 870.00 950.00
Cash collections (623.33) (773.33) (783.33) (896.67)
Ending receivables $526.67 $493.33 $580.00 $633.33

c. A 30-day collection period implies all receivables outstanding from previous quarter are collected
in the current quarter, and:

(90-30)/90 = 2/3 of current sales are collected. So:

Q1 Q2 Q3 Q4
Beginning receivables $360.00 $263.33 $246.67 $290.00
Sales 790.00 740.00 870.00 950.00
Cash collections (886.67) (756.67) (826.67) (923.33)
Ending receivables $263.33 $246.67 $290.00 $316.67

13. a. If you borrow $50,000,000 for one month, you will pay interest of:

Interest = $50,000,000(.0064)
Interest = $320,000

However, with the compensating balance, you will only get the use of:

Amount received = $50,000,000 – 50,000,000(.05)

 Amount received = $47,500,000

This means the periodic interest rate is:

Periodic interest = $320,000/$47,500,000

Periodic interest = .006737 or 0.674%

So, the EAR is:

EAR = [1 + ($320,000/$47,500,000)]12 – 1
EAR = .0839 or 8.39%

b. To end up with $15,000,000, you must borrow:

Amount to borrow = $15,000,000/(1 – .05)

Amount to borrow = $15,789,473.68

The total interest you will pay on the loan is:

Total interest paid = $15,789,473.68(1.0064)6 – 15,789,473.68

Total interest paid = $616,100.02