Upper and lower bounds for projections

Reference no: EM13821105

Problem 1:

GBK, Inc. is considering a new product. The proposal is as follows:

Project cost: $2,000,000
Project life: 5 yrs
Salvage value: zero
Depreciation: straight line to zero
Sales projection: 180 units per year
Price per unit: $20,000
Variable cost per unit will be: $12,400
Fixed costs per year: $490,000
Required return on the project: 10%
Relevant tax rate: 35%

Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10%

A] What are the upper and lower bounds for these projections?

B] What is the base case NPV?

C] What are the best case NPV and the worst case NPV scenarios?

D] Evaluate the sensitivity of your base-case NPV to changes in fixed costs.

E] What is the cash break-even level of output for this project (ignoring taxes)?

F] What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?

Problem 2:

You purchased one GBK, Inc. 6 percent coupon bond one year ago for $1,020. The bond makes annual payments and matures four years from now. You sell the bond today when the required return is 5 percent. The inflation rate was 2.8 percent over the past year. What was the real return on your investment?

Reference no: EM13821105

Questions Cloud

Business organizational forms subjects : 1. Which of the following business organizational forms subjects the owner(s) to unlimited liability? 2. Which of the following business organizational forms is easiest to raise capital?

Determine how much risk is acceptable : How can an industrial hygienist determine how much risk is acceptable - Describe how risk assessment can be used in industrial hygiene practice.

Complete repayment of the loan with interest : PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How muc..

Is this hormone more likely to be lipid-soluble : Given the following: You have a [hormone]plasma = 1 µM, which is 60 % bound by plasma proteins. Is this hormone more likely to be H2O-soluble or lipid-soluble

Upper and lower bounds for projections : Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10% What are the upper and lower bounds for these projections?

Examine organizations over the past century : examine organizations over the past century and pick out three global companies which had a major changes in their operations , but subsequently failed.

What roles do health care professionals from all areas : What roles do health care professionals from all areas healthcare, managed care, and government need to provide to the consumer to help reach specific objectives in 2020

Sex of pregnant women babies : Marie claims she can predict the sex of pregnant women's babies. She sees 1,000 women a year, and she always predicts a female. She charges $1,000 for a prediction, and she always predicts a female

Examples of discrete and continuous variables : Provide some examples of discrete and continuous variables. What attributes of these variables make them discrete and continuous? Why?

User Account

All Pages