Chapter 8 Problem 12 Suggested Answers

Notes:

a).

One: Only enter answers into the "Green" Cells.

Facts and Assumptions

Two: You MUST use the Excel Formulas, do NOT simply put a number in the answer cell.

Initial cost ($000 omitted)

$ 28,000

Three: A few Cells may have some guidance to help you with the answers.

Unit sales (000 0mitted)

400

Selling price per unit, this year

$ 60

Variable cost per unit, this year

$ 42

Life expectancy (years)

8

Salvage value

$0

Depreciation

Straight line

Tax rate

37%

Nominal discount rate

10.0%

Real discount rate

10.0%

Inflation rate

0.0%

Year

0

1

2

3

4

5

6

7

8

Initial cost

Annual sales (units)

Price per unit

Variable cost per unit

Revenue

Variable cost

Depreciation

Income before tax

Tax

Income after tax

+ Depreciation

Free Cash Flow

$ -

^--Check Figure Cell J28 = 5,831

b).

IRR

NPV @ nominal rate

^--Check Figure Cell B32 = $3,108

c).

In "Facts and assumptions" above, change the inflation rate to 8%.

IRR

NPV @ nominal rate

^--Check Figure Cell B37 = $1,351

d). Enter your response for Part d in the box, below,

e). Enter your response for Part e in the box, below,