7.

IRR is that interest rate where the NPV of a project is zero.

Net Present Value = - Initial outflow + Present value of inflows

Thus, the equation that defines the IRR for this project is:

0 = $26,000 + $11,000/(1+IRR) + $14,000/(1+IRR)2 + $10,000/(1+IRR)3

Using excel function IRR,

IRR = 16.69%

Since the IRR is greater than the required return, we would accept the project.

8.

NPV at 11% = $26,000 + $11,000/1.11 + $14,000/1.112 + $10,000/1.113 = $2,584.54

Since the NPV is positive at required return of 11%, the firm should accept the project.

NPV at 24% = $26,000 + $11,000/1.24 + $14,000/1.242 + $10,000/1.243 = -$2,779.06

Since the NPV is negative at required return of 24%, the firm should not accept the project.

3.

Porforma Income Statement

$
Sales 635,000
($635,000*44 $
Less: Variable cost %) 279,400
$
Fixed costs 193,000
Depreciation $
expense 54,000
Income before $
taxes 108,600
($108,600*35 $
Taxes %) 38,010
$
Net income 70,590

Projected net income = $70,590

13.

Initial investment = Cost of sausage system + Initial working capital investment = $540,000 + $29,000 =
$569,000

Annual depreciation = Cost of sausage system/Life of system = $540,000/5 years = $108,000

Tax savings on depreciation = $108,000 * 34% = $36,720

Incremental annual cash inflows from system = Post tax savings in operating costs + Tax savings on
depreciation = $170,000*(1-0.34) + $36,720 = $148,920

Present value of annuity = Annuity amount*{1-(1+r)-n}/r

Present value of annual cash inflows = $148,920*(1-1.10-5)/0.10 = $564,523.97

Sale value of system at the end of 5 years = $80,000

Book value of system at the end of 5 years = 0

Gain on sale of system = $80,000 - $0 = $80,000

Tax on gain on sale of system = $80,000 * 34% = $27,200

Net proceeds on sale of system = Sale value of system Tax on gain on sale = $80,000 - $27,200 =
$52,800

Release on working capital investment at the end of 5 years = $29,000

Terminal cash inlfows = $52,800 + $29,000 = $81,800

Present value of terminal cash inflows = $81,800/1.105 = $50,791.36

Net present value of project = - Initial investment + Present value of annual cash inflows + present value
of terminal cash inflows = - $569,000 + $564,523.97 + $50,791.36 = $46,315.33

1.

a. Variable cost per unit = Variable material cost + Variable labor cost = $9.64 +
$8.63 = $18.27

b. Total costs = Total variable costs for 215,000 units + Fixed costs =
($18.27*215,000 units) + $915,000 = $4,843,050.

c.

Cash breakeven point = Cash fixed costs/Contribution margin per unit

Contribution margin per unit = Selling price per unit variable costs per unit =
$39.99 - $18.27 = $21.72

Cash breakeven point = $915,000/$21.72 = 42,127 units

Accounting breakeven point = Total fixed costs including depreciation/Contribution
margin per unit = ($915,000 + $465,000)/$21.72 = 63,536 units

7.

Accountin
Contribution Cash g
Unit Unit Variable margin per Fixed Depreciati breakev breakeven
Price Cost unit Costs on en point point
$ $ $
2,980 $ 2,135 $ 845 9,000,000 3,100,000 10,651 14,320

$ 46 $ 41 $5 $ 135,000 $ 183,000 27,000 63,600

$9 $3 $6 $ 1,900 $ 930 317 472

Contribution margin per unit = Unit price Unit variable cost

Cash breakeven point = Fixed costs/Contribution margin per unit

Accounting breakeven point = (Fixed costs + Depreciation)/Contribution margin per

unit