My Question is as follows. It may be useful to read the assignment questions first (copied and pasted below, starting Lesson 6: Assignment Problems), otherwise the following, specific, questions may not make a lot of sense. 🙂
Regarding the assignment question, I’m particularly having troubles with D. I’m not certain if it is a trial and error process to get the right answer. I’ve tried to rearrange the formula NPV = Ct/(1+r)t in order to get my answer, but of course, I don’t. Also, I have had to find formulas online to find the OCF (which I calculate as $103,781.05) and then to calculate the quantity by rearranging the OCF formula, which I get to be 43.757393. I would like all of them to be answered because I’d like to check my answers, but I’m also wondering why it implies I should be using a trial and error process to get the Quantity for B when there is actually a formula (at least I believe there is) which can give an exact number. Thank you!
Lesson 6: Assignment Problems
You may find it helpful to use the Excel file named “Chapter 6 template.xls” to answer the following questions. You may choose to answer the questions without using the spreadsheet, but be very careful to show all work, so your marker can follow your calculation and award part marks as necessary.
In order to ensure that you know how the spreadsheet works, it is recommended that you replicate table 6.5 from page 182 of your textbook before proceeding to answer the following questions. (Note that a completed spreadsheet for Table 6.5 is included with the Excel file as a separate worksheet, so you can check your work.)
|6.1||You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, and your tax rate would be 40%. You could sell a chopper for $10,000, assuming your average variable cost per chopper is $3000, and assuming fixed costs, such as rent, utilities and salaries, would be $200,000 per year.|
|A.||Accounting breakeven: How many choppers would you have to sell to break even, ignoring the costs of financing?|
|B.||Financial breakeven: How many choppers would you have to sell to break even, if you required a 15% return? (Hint: Use the 15% as the discount rate and calculate net present value. In Excel, you may want to use the Goal Seek command, or simply use trial and error to find the correct amount.)|
|C.||Assuming you could sell 60 choppers per year, what would be your IRR?|
|D.||Assuming you could sell 60 choppers per year, what would your selling price have to be to generate a net present value of $150,000 at a 15% discount rate?|
|E.||If you could sell 60 choppers in the first year, and your sales volume increased by 5% each year until the end of year 5, what would the net present value be at a 15% discount rate?|
|F.||If you need to invest working capital equal to 10% of the next (coming) year‘s sales revenue, what would be the effect on the net present value of the project? Do you think that working capital investments always reduce the net present value of projects? (Assume a 15% discount rate, and sales volume increasesby 5% each year.)|
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