公司理财第8章

1、公司理财第8章Chapter 8: Strategy and Analysis in Using Net Present ValueConcept Questions Chapter 8 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 services at lower costs than competitors.3. Create a barrier

2、that makes it difficult for the other firms to compete effectively.4. Introduce variation on existing products to take advantage of unsatisfied demand5. Create product differentiation by aggressive advertising and marketing networks.6. Use innovation in organizational processes to do all of the abov

3、e. 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-makers evaluating projects Involving sequential decisions. At every point in the tree, there are different alternatives that should be analyz

4、ed. What are potential problems in using a decision tree?Potential problems 1) that a different discount rate should be used for different branches in the tree and 2) it is difficult for decision trees to capture managerial options.83 What is a sensitivity analysis?It is a technique used to determin

5、e how the result of a decision changes when some of the parameters or assumptions change. Why is it important to perforin a sensitivity analysis?Because it provides an analysis of the consequences of possible prediction or assumption errors. What is a break-even analysis?It is a technique used to de

6、termine the volume of production necessary 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-even point changes when some factors (such as

7、fixed costs, variable costs, 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 the market with the product, there is only a 50 percent chance of success On the other hand,

8、if the firm conducts test marketing of the VCR, it will take a year and will cost $2 million.Tlirough the test marketing, however, the firm is able to improve the product and increase the probability of success to 75 percent If the new product proves successful, the present value (at the time when t

9、he firm starts selling it) of the payoff is $20 million, while if it turns out to be a failure, the present value of the payoff is $5 niillion Should the firm conduct test marketing or go directly to the market? The appropriate discount rate is 15 percent8.1 Go directly:NPV = 0.5 x $20 million + 0.5

10、 x $5 million=$12.5 millionTest marketing:NPV = -$2 million + (0.75 x $20 million + 0.25 x $5 million)/1.15=$12.13 millionGo directlv to the market.62 The marketing manager for a growing consumer products firm is considering launching a new product. To determine consumersinterest in such a product,

11、the manager can conduct a focus group that will cost $120,000 and has a 70 percent chance of correctly predicting the 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 course

12、going directly to the market with no prior testing will be the correct move 50 percent of the time. 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 x $1,200,0

13、00 = $720,000 Consulting firm: -$400000 + 0.90 x $1,200,000 = $680,000 Direct marketing: 0.50 x $1,200,000 = $600,000The manager should conduct a focus group.63 Tandem Bicycles is noticing a decline in sales due to the increase of lower-priced import products from the Far East. The CFO is considerin

14、g a number of strategies to maintain its market share The options she sees are the following: Price the products more aggressively, resulting in a $1.3 million decline in cash flows.Tlie likelihood that Tandem will lose no cash flows to the imports is 55 percent; there is a45 percent probability tha

15、t 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 placed upon overseas manufacturers of bicycles. This will cost Tandem $800,000 and will have a 75 percent success rate, that is, no loss in cash flows to the

16、importers. If the lobbyists do not succeed. Tandem Bicycles will lose $2 million in cash flows. As the assistant to the CFO, which strategy would you recommend to vour boss?Accounting BreakEvgn Analysis83 Price more aggressively:$1,300,000】 (0.55 x0) + 0.45 x (-$550,000)=-$1,547,500Hire lobbyist:$80

17、0,000 + (0.75 x0) + 0.25 x (-$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 the straight-line method and will pro

18、duce 20,000 units of calculators in the first year The variable 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 of the calculator be for the firm to have a zero profit?64 Let

19、sales price be x.Depreciation = $600,000 / 5 = $120,000BEP: ($900,000 + $120,000) / (x $15) = 20,000x = $6665 What is the niininiuni number of units that a distributor of big-screen TVs must sell in a given period to break even?Sales price _ $1,500Variable costs _ $1,100Fixed costs _ $120,000Depreci

20、ation _ $20,000Tax rate _ 35%65 The accounting break-even=(120,000 + 20,000) / (1,500 1,100)=350 units66 You are considering investing in a fledgling company that cultivates abalone for sale to local restaurants The proprietor says he' 11 return all profits to you after covering operating costs

21、and his salary How many abalone must be harvested and sold in the first year of operations 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 selk

22、 300,000 abalone?66 a. The accounting break-even=340,000 /(2.00 0.72)=265,625 abalonesb. ($2.00 x 300,000) - (340,000 + 052 x 300,000) (0.65)=$28,600This is the after tax profitPresent Value Break-Even Analysis67 Using the information in the problem above, what is the present value break-even point

23、if the discount rate is 15 percent, initial investment is $140,000, and the life of the project is seven years? Assume a straight-line depreciation method with a zero salvage value.&7EAC =$140,000/ AjI5 二 $33,650Depreciation = $140,000 / 7 = $20,000BEP = $33,650 + $340,000 x 0.65 $20,000 x 0.35/

24、 ($2 $052) x 0.65=297,656.25« 297,657 units8.8 Kids & Toys Inc. has purchased a $200,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method for its economic life of five years and will be worthless after its life. The firm expects that the sales p

25、rice of the toy is $25 while its variable cost is $5. The firm should also pay $350,000 as fixed costs each year The corporate tax rate for the company is 25 percent, and the appropriate discount rate is 12 percent What is the present value break-even point?8.8 Depreciation = $200,000 / 5 = $40,000E

26、AC =$200,000/ A；J2 = $200,000 / 3.60478=$55,482BEP = $55,482 + $350,000 x 0.75 $40,000 x 0.25/ ($25 $5) x 0.75=20S32.13« 20533 units&9 The Cornchopper Company is considering the purchase of a new harvester Tlie company is currently involved in deliberations with the manufacturer and the par

27、ties have not come to settlement regarding the final purchase price. The management of Cornchopper has hired you to determine the break-even purchase price of the harvesterThis price is that which will make the NPV of the project zero Base your analysis on the following facts: The new harvester is n

28、ot expected to affect revenues, but operating expenses will be reduced 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 was purchased for $45,(M)0 It has been depreciated on a straight-line basis The old harvester has a current

29、 market value of $20,000. The new harvester will be depreciated on a straight-line basis over its 10year 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 from selling the old ha

30、rvester, and any tax effects will occur immediately. Capital gains and losses 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&9 Let I be the break-even purchase price.Incremental CoSale

31、of the old machine$20,000Tax effect3,400Total$23,400Depreciation per period= $45,000/15=$3,000Book value of the machine=$45,000 5 x $3,000=$30,000Loss on sale of machine=$30,000 $20,000=$10,000Tax credit due to loss=$10,000 X 0.34=$3,400Incremental cost savings:$10,000 (1 034) = $6,600Incremental de

32、preciation tax shield:1/10- $3,000 (0.34)The break-even purchase price is the Investment (I), which makes the NPV be zero. NPV =0=-I + $23,400 + $6,600 A需+ I/10 $3,000 (034) A/=-I + $23,400 + $6,600 (5.0188)+ I (0.034) (5.0188) $3,000 (0.34) (5.0188)1 = $61,981Scenario Analysis&10 Ms. Thompson,

33、as the CFO of a clock maker, is considering an investment of a $420,0(H) machine that has a seven-year life and no salvage value The machine is depreciated by a straight-line method with a zero salvage over the seven years The appropriate discount rate for cash flows of the project is 13 percent, an

34、d the corporate tax rate of the company is 35 percent Calculate the NPV of the project in the following scenario. What is your conclusion 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

35、S. 10 Pessimistic:NPV= -$420,000 +=-$123,021.71Expected:NPV = -$420,000 +7Et=l23.OOO($38-S21)-S32O,OOOxO.654.S6O.OOOxO.351.I3125.000($40 - $20)- $3OO.OOOxO65+$6O.OOOxO351.131=$247,814.17工27.000( $42-$ 19) -$280.000 x 0.65+$60.000x0.351.131Optimistic:NPV = -$420,000 +=$653,146.42Even though the NPV o

36、f pessimistic case is negative, if we change one input while all others are assumed to meet their expectation, we have all positive NPVs like the one before. Thus, this project is quite profitable.PessimisticNPVUnit sales23,000$132,826.30Price$38$104,07933Variable costs$21$175,946.75Fixed costs$320,

37、000$190320.248.11 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 following information about the results of launching a new racket, will you undertake the project?(Assumptions: Tax r

38、ate _ 40%, Effective discount rate _ 13%, Depreciation _ $300,000per 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 $ 800,0

39、00 $ 750,00()Investment $1,500,000 $1,5()0,000 $1,500,000841 Pessimistic:NPV = -$1,500,000亠 Q (110.000 x 0.22($ 115 -S72)一 $850.000)x 0.60 + $300.000 x 0.401.13= -$675,701.68 Expected: NPV = -$1,500,000=$399,304.88Optimistic:NPV =$1,500,0001.1311.131=$1$61,468.43The expected present value of the new

40、 tennis racket is $428,357.21. (Assuming thereare equal chances of the 3 scenarios occurring.)8.12 What would happen to the analysis done above if your competitor introduces a graphite composite that is even lighter than your product? What factors would this likely affect? Do an NPV analysis assumin

41、g market size increases (due to more awareness of graphite-based rackets) to the level predicted by the optimistic scenario but your market share decreases to the pessimistic level (clue to competitive forces). What does this tell you about the relative importance of market size versus market share?

42、二 $251,581.17The 3% drop in market share hurt significantly more than the 10000 increase 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.Tlie Option to Abandon8.13 You have been hired as a financial analyst to do a feasibility study of a new video game for Passivision. 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 flo