公司理财第8章

Chapter 8: Strategy and Analysis in Using Net Present Value Concept Questions - Chapter 88.1 What are the ways a firm can create positive NPV.1.Be first to introduce a new product.2.Further develop a core competency to product goods or servicesat lower costs than competitors.3.Create a barrier that makes it difficult for the other firms tocompete effectively.4.Introduce variation on existing products to take advantage ofunsatisfied demand5.Create product differentiation by aggressive advertising andmarketing networks.e innovation in organizational processes to do all of theabove.How can managers use the market to help them screen out negative NPV projects?8.2 What is a decision tree?It is a method to help capital budgeting decision-makersevaluating projects involving sequential decisions. At everypoint in the tree, there are different alternatives that should be analyzed.What are potential problems in using a decision tree?Potential problems 1) that a different discount rate should beused for different branches in the tree and 2) it is difficult for decision trees to capture managerial options.8.3 What is a sensitivity analysis?It is a technique used to determine how the result of a decisionchanges when some of the parameters or assumptions change.Why is it important to perform a sensitivity analysis?Because it provides an analysis of the consequences of possibleprediction or assumption errors.What is a break-even analysis?It is a technique used to determine the volume of productionnecessary to break even, that is, to cover not only variable costs but fixed costs as well.Describe how sensitivity analysis interacts with break-even analysis.Sensitivity analysis can determine how the financial break-evenpoint changes when some factors (such as fixed costs, variablecosts, or revenue) change.Answers to End-of-Chapter ProblemsQUESTIONS AND PROBLEMSDecision Trees8.1 Sony Electronics, Inc., has developed a new type of VCR. If the firm directly goes to themarket with the product, there is only a 50 percent chance of success. On the other hand, ifthe firm conducts test marketing of the VCR, it will take a year andwill cost $2 million.Through the test marketing, however, the firm is able to improve the product and increase theprobability of success to 75 percent. If the new product proves successful, the present value(at the time when the firm starts selling it) of the payoff is $20 million, while if it turns out tobe a failure, the present value of the payoff is $5 million. Should the firm conduct testmarketing or go directly to the market? The appropriate discount rate is 15 percent.8.1 Go directly:NPV = 0.5 $20 million + 0.5 $5 million= $12.5 millionTest marketing:NPV = -$2 million + (0.75 $20 million + 0.25 $5 million) / 1.15= $12.13 millionGo directly to the market.8.2 The marketing manager for a growing consumer products firm is consideringlaunching anew product. To determine consumers’ interest in such a product, the manager can conducta focus group that will cost $120,000 and has a 70 percent chanceof correctly predictingthe success of the product, or hire a consulting firm that will research the market at a cost of$400,000. The consulting firm boasts a correct assessment record of 90 percent. Of coursegoing directly to the market with no prior testing will be the correct move 50 percent of thetime. If the firm launches the product, and it is a success, the payoff will be $1.2 million.Which action will result in the highest expected payoff for the firm?8.2 Focus group: -$120,000 + 0.70 $1,200,000 = $720,000Consulting firm: -$400,000 + 0.90 $1,200,000 = $680,000Direct marketing: 0.50 $1,200,000 = $600,000The manager should conduct a focus group.8.3 Tandem Bicycles is noticing a decline in sales due to the increase of lower-priced importproducts from the Far East. The CFO is considering a number of strategies to maintain itsmarket share. The options she sees are the following:• Price the products more aggressively, resulting in a $1.3 million decline in cash flows.The likelihood that Tandem will lose no cash flows to the imports is 55 percent; there is a45 percent probability that they will lose only $550,000 in cash flows to the imports. • Hire a lobbyist to convince the regulators that there should be important tariffs placedupon overseas manufacturers of bicycles. This will cost Tandem $800,000 and will have a75 percent success rate, that is, no loss in cash flows to the importers. If the lobbyists donot succeed, Tandem Bicycles will lose $2 million in cash flows.As the assistant to the CFO, which strategy would you recommend to your boss?Accounting Break-Even Analysis8.3 Price more aggressively:-$1,300,000 + (0.55 0) + 0.45 (-$550,000)= -$1,547,500Hire lobbyist:-$800,000 + (0.75 0) + 0.25 (-$2,000,000)= -$1,300,000Tandem should hire the lobbyist.8.4 Samuelson Inc. has invested in a facility to produce calculators. The price of the machine is$600,000 and its economic life is five years. The machine is fully depreciated by thestraight-line method and will produce 20,000 units of calculators in the first year. Thevariable production cost per unit of the calculator is $15, while fixed costs are $900,000.The corporate tax rate for the company is 30 percent. What should the sales price per unit ofthe calculator be for the firm to have a zero profit?8.4 Let sales price be x.Depreciation = $600,000 / 5 = $120,000BEP: ($900,000 + $120,000) / (x - $15) = 20,000x = $668.5 What is the minimum number of units that a distributor of big-screen TVs must sell in agiven period to break even?Sales price _ $1,500Variable costs _ $1,100Fixed costs _ $120,000Depreciation _ $20,000Tax rate _ 35%8.5 The accounting break-even= (120,000 + 20,000) / (1,500 - 1,100)= 350 units8.6 You are considering investing in a fledgling company that cultivates abalone for sale tolocal restaurants. The proprietor says he’ll return all profits to you after covering operatingcosts and his salary. How many abalone must be harvested and sold in the first year ofoperations for you to get any payback? (Assume no depreciation.)Price per adult abalone _ $2.00Variable costs _ $0.72Fixed costs _ $300,000Salaries _ $40,000Tax rate _ 35%How much profit will be returned to you if he sells 300,000 abalone?8.6 a. The accounting break-even= 340,000 / (2.00 - 0.72)= 265,625 abalonesb. [($2.00 300,000) - (340,000 + 0.72 300,000)] (0.65)= $28,600This is the after tax profit.Present Value Break-Even Analysis8.7 Using the information in the problem above, what is the present value break-even point ifthe discount rate is 15 percent, initial investment is $140,000, and the lifeof the project isseven years? Assume a straight-line depreciation method with a zero salvage value.A = $33,6508.7 EAC = $140,000 / 7.015Depreciation = $140,000 / 7 = $20,000BEP = {$33,650 + $340,000 0.65 - $20,000 0.35} / {($2 - $0.72) 0.65}= 297,656.25297,657 units8.8 Kids & Toys Inc. has purchased a $200,000 machine to produce toy cars. The machine willbe fully depreciated by the straight-line method for its economic life of five years and will beworthless after its life. The firm expects that the sales price ofthe toy is $25 while its variablecost is $5. The firm should also pay $350,000 asfixed costs each year. The corporate tax ratefor the company is 25 percent, and the appropriate discount rate is 12 percent. What is thepresent value break-even point?8.8 Depreciation = $200,000 / 5 = $40,000A = $200,000 / 3.60478EAC = $200,000 / 5.012= $55,482BEP = {$55,482 + $350,000 0.75 - $40,000 0.25} / {($25 - $5)0.75}= 20,532.1320533 units8.9 The Cornchopper Company is considering the purchase of a new harvester. Thecompany is currently involved in deliberations with the manufacturer and the partieshave not come to settlement regarding the final purchase price. The management ofCornchopperhas hired you to determine the break-even purchase price of the harvester.This price is that which will make the NPV of the project zero. Base your analysis onthe following facts:• The new harvester is not expected to affect revenues, but operating expenses will bereduced by $10,000 per year for 10 years.• The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It waspurchased for $45,000. It has been depreciated on a straight-line basis.• The old harvester has a current market value of $20,000.• The new harvester will be depreciated on a straight-line basis over its 10-year life.• The corporate tax rate is 34 percent.• The firm’s required rate of return is 15 percent.• All cash flows occur at year-end. However, the initial investment, the proceeds fromselling the old harvester, and any tax effects will occur immediately. Capital gains andlosses are taxed at the corporate rate of 34 percent when they are realized. • The expected market value of both harvesters at the end of their economic lives is zero.8.9 Let I be the break-even purchase price.Incremental C0Sale of the old machine $20,000Tax effect 3,400Total $23,400Depreciation per period= $45,000 / 15= $3,000Book value of the machine= $45,000 - 5 $3,000= $30,000Loss on sale of machine= $30,000 - $20,000= $10,000Tax credit due to loss= $10,000 0.34= $3,400Incremental cost savings:$10,000 (1 - 0.34) = $6,600Incremental depreciation tax shield:[I / 10 - $3,000] (0.34)The break-even purchase price is the Investment (I), which makes the NPV be zero.NPV = 0A= -I + $23,400 + $6,600 10.015A+ [I / 10 - $3,000] (0.34) 1015.0= -I + $23,400 + $6,600 (5.0188)+ I (0.034) (5.0188) - $3,000 (0.34) (5.0188)I = $61,981Scenario Analysis8.10 Ms. Thompson, as the CFO of a clock maker, is considering an investment of a $420,000machine that has a seven-year life and no salvage value. The machine is depreciated by astraight-line method with a zero salvage over the seven years. The appropriate discountrate for cash flows of the project is 13 percent, and thecorporate tax rate of the company is35 percent. Calculate the NPV of the project inthe following scenario. What is yourconclusion about the project?Pessimistic Expected OptimisticUnit sales 23,000 25,000 27,000Price $ 38 $ 40 $ 42Variable costs $ 21 $ 20 $ 19Fixed costs $320,000 $300,000 $280,000 8.10 Pessimistic:NPV = -$420,000 +(){}23,000$38$21$320,0000.65$60,0000.351.13tt17--⨯+⨯=∑= -$123,021.71 Expected:NPV = -$420,000 +(){}25,000$40$20$300,0000.65$60,0000.351.13t7--⨯+⨯=∑t1= $247,814.17 Optimistic:NPV = -$420,000 +(){}27,000$42$19$280,0000.65$60,0000.351.13tt17--⨯+⨯=∑= $653,146.42Even though the NPV of pessimistic case is negative, if we change oneinput while all others are assumed to meet their expectation, we have all positive NPVs like the one before. Thus, this project is quiteprofitable.PessimisticNPVUnit sales 23,000 $132,826.30Price $38 $104,079.33Variablecosts$21 $175,946.75Fixed costs $320,000 $190,320.248.11 You are the financial analyst for a manufacturer of tennis rackets that has identified agraphite-like material that it is considering using in its rackets. Given the followinginformation about the results of launching a new racket, will you undertake the project?(Assumptions: Tax rate _ 40%, Effective discount rate _ 13%, Depreciation _ $300,000 per year, and production will occur over the next five years only.)Pessimistic Expected OptimisticMarket size 110,000 120,000 130,000Market share 22% 25% 27%Price $ 115 $ 120 $ 125Variable costs $ 72 $ 70 $ 68Fixed costs $ 850,000 $ 800,000 $ 750,000Investment $1,500,000 $1,500,000 $1,500,0008.11 Pessimistic:NPV = -$1,500,000+(){}1100000220000600000401131,.$850,.$300,..⨯--⨯+⨯=∑$115$725tt= -$675,701.68Expected:NPV = -$1,500,000+(){}1200000250000600000401131,.$800,.$300,..⨯--⨯+⨯=∑$120$705tt= $399,304.88Optimistic:NPV = -$1,500,000+(){}130,0000.27$125$68$750,0000.60$300,0000.401.13tt15⨯--⨯+⨯=∑= $1,561,468.43The expected present value of the new tennis racket is $428,357.21.(Assuming there are equal chances of the 3 scenarios occurring.)8.12 What would happen to the analysis done above if your competitor introduces a graphitecomposite that is even lighter than your product? What factors would this likely affect? Doan NPV analysis assuming market size increases (due to more awareness of graphite-basedrackets) to the level predicted by the optimistic scenario but your market share decreases tothe pessimistic level (due to competitive forces). What does this tell you about the relativeimportance of market size versus market share?8.12 NPV =(){}-+⨯--⨯+⨯=∑1,500,000130,0000.22$120$70$800,0000.60$300,0000.401.13tt15= $251,581.17The 3% drop in market share hurt significantly more than the 10,000increase in market size helped. However, if the drop were only 2%, the effects would be about even. Market size is going up by over 8%, thus it seems market share is more important than market size.The Option to Abandon8.13 You have been hired as a financial analyst to do a feasibility study of a new video game forPassivision. Marketing research suggests Passivision can sell 12,000 units per year at$62.50 net cash flow per unit for the next 10 years. Total annual operating cash flow isforecasted to be $62.50 _ 12,000 _ $750,000. The relevant discount rate is 10 percent.The required initial investment is $10 million.a. What is the base case NPV?b. After one year, the video game project can be abandoned for $200,000. After one year,expected cash flows will be revised upward to $1.5 million or to $0 with equal probability. What is the option value of abandonment? What is the revised NPV?8.13 a. NPV = -$10,000,000 + ( $750, 000 1010.A) = -$5,391,574.67b. Revised NPV = -$10,000,000 + $750,000 / 1.10 + [(.5$1,500,000910.A )+ (.5 $200,000 )] / 1.10= -$5,300,665.58 Option value of abandonment = -$5,300,665.58 – ( -$5,391,574.67 )= $90,909.098.14 Allied Products is thinking about a new product launch. The vice president of marketingsuggests that Allied Products can sell 2 million units per year at $100 net cash flow perunit for the next 10 years. Allied Products uses a 20-percent discount rate for new productlaunches and the required initial investment is $100 million. a. What is the base case NPV?b. After the first year, the project can be dismantled and sold for scrap for $50 million. Ifexpected cash flows can be revised based on the first year ’s experience, when would itmake sense to abandon the project? (Hint: At what level of expected cash flows does itmake sense to abandon the project?)8.14 a. NPV = -$100M + ( $100 2M 1020.A ) = $738.49Millionb.$50M = C 920.AC = $12.40 Million (or 1.24 Million units )。