Problems
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Skill-Building Problems.
1. A project has a fixed cost of $73,000, variable costs of $9.20 per unit, and generates sales revenue
of $15.40 per unit. What is the break-even point in unit sales, where accounting profit exactly
equals zero, and what is the intuition for it?
2. Suppose a firm is considering the following project, where all of the dollar figures are in
thousands of dollars. In year 0, the project requires $24,490 investment in plant and equipment, is
depreciated using the straight-line method over seven years, and there is a salvage value of
$5,800 in year 7. The project is forecast to generate sales of 4,800 units in year 1 and grow at a
sales growth rate of 72.0% in year 2. The sales growth rate is forecast to decline by 12.0% in
years 3, to decline by 15.0% in year 4, to decline by 18.0% in year 5, to decline by 23.0% in year
6, to decline by 29.0% in year 7. Unit sales will drop to zero in year 8. The inflation rate is
forecast to be 2.7% in year 1 and rising to 3.5% in year 7. The real cost of capital is forecast to be
10.2% in year 1, rising to 11.9% in year 7. The tax rate is forecast to be a constant 38.0%. Sales
revenue per unit is forecast to be $12.20 in year 1 and then grow with inflation. Variable cost per
unit is forecast to be $7.30 in year 1 and then grow with inflation. Cash fixed costs are forecast to
be $6,740 in year 1 and then grow with inflation. What is the project NPV? What is the NPV
Break-Even Point in Year 1 Unit Sales, where NPV equals zero? What is the NPV Break-Even
Point in the Year 2 Sales Growth Rate, where NPV equals zero? What is the NPV Break-Even
Contour in the two-dimensional space of Year 1 Unit Sales and Year 2 Sales Growth Rate?
Live In-class Problems.
3. Given the partial Based On Accounting Profit spreadsheet BevenacZ.xls, do step 3 Back Solve
for the Break-Even Point using the Income Statement.
4. Given the partial Based On NPV spreadsheet BevennpZ.xls, do steps 7 Create a List of Input
Variables and an Output Formula and 8 Two-Variable Data Table.
Skill-Building Problems.
1. A project has a fixed cost of $73,000, variable costs of $9.20 per unit, and generates sales revenue
of $15.40 per unit. What is the break-even point in unit sales, where accounting profit exactly
equals zero, and what is the intuition for it?
2. Suppose a firm is considering the following project, where all of the dollar figures are in
thousands of dollars. In year 0, the project requires $24,490 investment in plant and equipment, is
depreciated using the straight-line method over seven years, and there is a salvage value of
$5,800 in year 7. The project is forecast to generate sales of 4,800 units in year 1 and grow at a
sales growth rate of 72.0% in year 2. The sales growth rate is forecast to decline by 12.0% in
years 3, to decline by 15.0% in year 4, to decline by 18.0% in year 5, to decline by 23.0% in year
6, to decline by 29.0% in year 7. Unit sales will drop to zero in year 8. The inflation rate is
forecast to be 2.7% in year 1 and rising to 3.5% in year 7. The real cost of capital is forecast to be
10.2% in year 1, rising to 11.9% in year 7. The tax rate is forecast to be a constant 38.0%. Sales
revenue per unit is forecast to be $12.20 in year 1 and then grow with inflation. Variable cost per
unit is forecast to be $7.30 in year 1 and then grow with inflation. Cash fixed costs are forecast to
be $6,740 in year 1 and then grow with inflation. What is the project NPV? What is the NPV
Break-Even Point in Year 1 Unit Sales, where NPV equals zero? What is the NPV Break-Even
Point in the Year 2 Sales Growth Rate, where NPV equals zero? What is the NPV Break-Even
Contour in the two-dimensional space of Year 1 Unit Sales and Year 2 Sales Growth Rate?
Live In-class Problems.
3. Given the partial Based On Accounting Profit spreadsheet BevenacZ.xls, do step 3 Back Solve
for the Break-Even Point using the Income Statement.
4. Given the partial Based On NPV spreadsheet BevennpZ.xls, do steps 7 Create a List of Input
Variables and an Output Formula and 8 Two-Variable Data Table.