1. We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows:   Year Unit Sales 1 97,000     2 109,000     3 132,000     4 138,000     5 91,000…

We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows:

Year

Unit Sales

1

97,000    

2

109,000    

3

132,000    

4

138,000    

5

91,000    

The new system will be priced to sell at $435 each.

The cockroach eradicator project will require $2,200,000 in net working capital to start, and total net working capital will rise to 15 percent of the change in sales. The variable cost per unit is $305, and total fixed costs are $1,700,000 per year. The equipment necessary to begin production will cost a total of $18 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20 percent. In five years, this equipment will actually be worth about 20 percent of its cost.

The relevant tax rate is 35 percent, and the required return is 15 percent. Based on these preliminary estimates, what is the NPV of the project? (Round your intermediate calculations and final answer to 2 decimal places. (e.g., 32.16))

  NPV

$

A proposed cost-saving device has an installed cost of $600,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax rate is 35 percent.

a.

What must the pre-tax cost savings be for us to favour the investment? We require a 11 percent return. (Hint: This one is a variation on the problem of setting a bid price.) (Do not round your intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Cost savings

$  

b.

Suppose the device will be worth $84,000 in salvage (before taxes). How does this change your answer? (Do not round your intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Cost savings

$  

A five-year project has an initial fixed asset investment of $355,000, an initial NWC investment of $39,000, and an annual OCF of −$38,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 11 percent, what is this project’s equivalent annual cost, or EAC? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Equivalent annual cost

$  

You are considering a new product launch. The project will cost $2,300,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year; price per unit will be $30,000, variable cost per unit will be $18,500, and fixed costs will be $610,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 36 percent.

a.

Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (Negative amount should be indicated by a minus sign. Round your NPV answers to 2 decimal places. (e.g., 32.16))

  Scenario

Unit Sales

Variable Cost

Fixed Costs

NPV

  Base

$  

$  

$  

  Best

  Worst

b.

Evaluate the sensitivity of your base-case NPV to changes in fixed costs. (Negative amount should be indicated by a minus sign. Round your answer to 3 decimal places. (e.g., 32.161))

  ΔNPV/ΔFC

$  

c.

What is the cash break-even level of output for this project (ignoring taxes)? (Round your answer to 2 decimal places. (e.g., 32.16))

  Cash break–even

d-1

What is the accounting break-even level of output for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

  Accounting break–even

d-2

What is the degree of operating leverage at the accounting break-even point? (Round your answer to 4 decimal places. (e.g., 32.1616))

  Degree of operating leverage

5.   Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider a 2010 Lexus RX 450h,which had a list price of $5,535 (-including tax consequences) more than a Lexus RX 350. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $240 more than the traditional sedan. The mileage estimate was 5.4 litre/100 km for the hybrid and 7.1 for the traditional sedan.

a.

Assume that gasoline costs $1.75 per litre and you plan to keep either car for six years. How many kilometres per year would you need to drive to make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not round intermediate calculations and round your final answer to 2 decimal palces. (e.g., 32.16))

  Kilometres per year

b.

If you drive 14,400 km per year and keep either car for six years, what litre per litre would make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Price per litre

$  

c-1.

Gasoline costs $1.75 per litre and you plan to keep either car for six years. How many kilometres per year would you need to drive to make the decision to buy the hybrid worthwhile? Assume the appropriate interest rate is 11 percent and all cash flows occur at the end of the year. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Kilometres per year

c-2.

If you drive 14,400 kilometres per year and keep either car for six years, what price per litre would make the decision to buy the hybrid worthwhile? Assume the appropriate interest rate is 10 percent and all cash flows occur at the end of the year. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Price per litre

$  

A proposed project has fixed costs of $74,000 per year. The operating cash flow at 8,000 units is $93,400. Ignoring the effect of taxes, what is the degree of operating leverage? (Round your answer to 4 decimal places. (e.g., 32.1616))

  Degree of operating leverage

If units sold rise from 8,000 to 8,500, what will be the new operating cash flow? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Operating cash flow

What is the new degree of operating leverage? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))

  DOL

You’ve observed the following returns on Regina Computer’s stock over the past five years: 11 percent, –10 percent, 19 percent, 18 percent, and 10 percent.

a.

What was the arithmetic average return on Regina’s stock over this five-year period? (Round your answer to 1 decimal place. (e.g., 32.1))

  Average return

%  

b-1

What was the variance of Regina’s returns over this period? (Round your answer to 5 decimal places. (e.g., 32.16161))

  Variance

b-2

What was the standard deviation of Regina’s returns over this period? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Standard deviation

%  

8.

A stock has had the following year-end prices and dividends:

Year

    Price

Dividend

1

$

43.39

–

2

48.37

$

0.63

3

57.29

0.66

4

45.37

0.80

5

52.29

0.85

6

61.37

0.93

What are the arithmetic and geometric returns for the stock? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  Arithmetic return

%  

  Geometric return

%  

You’ve observed the following returns on Regina Computer’s stock over the past five years: 14 percent, –7 percent, 17 percent, 15 percent, and 10 percent. Suppose the average inflation rate over this period was 1.4 percent and the average T-bill rate over the period was 5.1 percent.

a.

What was the average real return on Regina’s stock? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Average real return

%  

b.

What was the average nominal risk premium on Regina’s stock? (Do not round intermediate calculations and round your answer to 1 decimal place. (e.g., 32.1))

  Average nominal risk

%