Assignment:
Q1. (NVP, PI, and IRR calculations) Greenwich Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay associated with the expansion would be $2,500,000and the project would generate incremental free cash flow of $750,000 per year for 6 years. The appropriate required rate of return is 11 percent.
a.) Calculate the net present value.
b.) Calculate the profitability index.
c.) Calculate the internal rate of return.
d.) Should this project be accepted?
Q2. (Payback period, net present value, profitability index, and internal rate of return calculations) You are considering a project with an initial cash outlay of $160,000 and expected free cash flows of $40,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent.
a.) What is the project’s payback period?
b.) What is the project’s NVP?
c.) What is the project’s PI?
d.) What is the project’s IRR?
Q3. What would be the discounted payback for the period for the project in problem #2?
Q4. (Break-even point) Roberto Martinez is the chief financial analyst at New Wave Pharmaceuticals (NWP), a company that produces a vitamin claimed to prevent the common cold. Roberto has been asked to determine the company’s break-even point in units. He obtained the following information from the company’s financial statements for the year just ended. In addition, he found out the NWP’S production manager that the company produced 40 million units in that year. What will Roberto determine the break-even point to be?
Sales $20,000,000
Variable cost 16,000,000
Revenue before fixed cost $ 4,000,000
Fixed costs 2,400,000
EBIT $ 1,600,000
Q5. (Leverage analysis) New Wave Pharmaceuticals (see description and data in problem #4) is concerned that recent unfavorable publicity about the questionable medicinal benefits of other vitamins will temporarily hurt NWP’s sales even though such assertions do not apply to NWP’s vitamin. Accordingly, Roberto has been asked to determine the company’s level of risk based on the financial information for the year just ended. In addition to the data described in Problem #2 Roberto learned form the company’s financial statements that the company incurred $800,000 of interest expense in the year just ended. What will Roberto determine the (a) degree of operating leverage, (b) degree of financial leverage, and (c) degree of combined leverage to be?
Q6. (Operating leverage) the B.H. Williams Company manufactures an assortment of wood-burring stoves. The average selling price for the various units is $475.00. The associated variable cost is $350 per unit. Fixed costs for the firm average $200,000 annually.
a.) What is the break-even point in units for the company?
b.) What is the dollar sales volume the firm must achieve to reach the break-even point?
c.) What is the degree of operating leverage for a production and sales level of $6,000 units for the firm? (Calculate to three decimal places.)
Provide complete and step by step solution for the question and show calculations and use formulas.