Question 12.4: You are considering investing in a business that has monthly...

Fundamentals of Corporate Finance

You are considering investing in a business that has monthly fixed costs of $5,500 and sells a single product that costs $35 per unit make. This product sells for $90 per unit. What is the annual pretax operating cash flow break-even point for this business?

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Question: 12.1

Using Break-Even Numbers SITUATION: You have just finished calculating the pretax operating cash flow and accounting operating profit break-even numbers for the in-home computer-support business. These numbers are as follows: • Pretax operating cash flow break-even point: 720 house calls per year ...

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DECISION: With annual unit sales of 720, EBIT will...

Question: 12.2

Ranking Investment Alternatives SITUATION: The profitability index concept does not apply only to a firm’s investments in projects. It can also apply to your personal investments. For example, suppose that you have just inherited $50,000 and want to invest it in ways that create as much value as ...

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DECISION: You should invest in the duplex apartmen...

Question: 12.A.6

Ranking Projects Using the PI PROBLEM: You have identified the following seven positive NPV investments for your in-home computer-support business. If you have $50,000 to invest this year, which projects should you accept? ...

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Calculating the PI and ranking the projects from h...

Question: 12.A.5

Calculating the EBIT Break-Even Point PROBLEM: Calculate the expected accounting operating profit break-even number of house calls per month for the in-home computer-support business after six months of operation. APPROACH: Use Equation 12.6 to calculate EBIT break-even for the business. ...

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From Learning by Doing Application 12.1, we know t...

Question: 12.A.4

Calculating the EBITDA Break-Even Point PROBLEM: Calculate the expected pretax operating cash flow (EBITDA) break-even number of house calls per month for the in-home computer-support business after six months. APPROACH: Use Equation 12.4 to calculate EBITDA break-even for a project. ...

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From Learning by Doing Application 12.1, we know t...

Question: 12.A.3

Calculating Cash Flow and Accounting DOL PROBLEM: You have decided to calculate the operating leverage for the in-home computer-support business you are thinking about starting. What will Cash Flow DOL and Accounting DOL be in six months if EBIT is $2,000, FC is $3,000, and D&A is $1,000? APPROACH: ...

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From Equation 12.2, Cash Flow DOL is:

Cash ...

Question: 12.A.2

Fixed Costs and Fluctuations in EBIT PROBLEM: As you prepare the financial forecast for your computer-support business, you worry about the impact of fluctuations in the number of house calls on EBIT. You decide to examine how converting some fixed costs to variable costs will affect the ...

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$1,500 monthly fixed contract: As we determined in...

Question: 12.A.1

Forecasting EBIT PROBLEM: You have decided to start a business that provides in-home technical computer support to people in the community near your university. You have seen national advertisements for a company that provides these services in other communities. You would run this business ...

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The calculation is as follows:

\begin{matri...

Question: 12.5

You are considering a project that has an initial outlay of $1 million. The profitability index of the project is 2.24. What is the NPV of the project? ...

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You can use Equation 12.8 to solve for the NPV: [l...

Question: 12.3

The Vinyl CD Co. is going to take on a project that is expected to increase its EBIT by $90,000, its fixed cost cash expenditures by $100,000, and its depreciation and amortization by $80,000 next year. If the project yields an additional 10 percent in revenue, what percentage increase in ...

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\begin{matrix} Accounting \ DOL&=&1...