Suppose an initial investment of $50 will return $35/year for three years (assume the $35 is received each year at the end of the year).
At a discount rate of 20%, this investment Is/is not profitable.
Category: Finance
Solar Panel Project Break-Even Analysis with Limited Operating Hours
If the solar panels can operate only for 3,465 hours a year at maximum, the project(would/would not) break even.
Continue to assume that the solar panels can operate only for 3,465 hours a year at maximum.
In order for the project to be worthwhile (i.e., at least break even), the university would need a grant of at least $90,083.97 or $225,209.93 or $150,139.95 or $135,125.96
The Break-Even Analysis for Toy Truck Production
Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $5.50 million in a plastic injection molding machine (which can be sold for $5 million immediately) and $300,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $3. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.
If the estimated demand is 100,000 trucks, the break-even price is
per truck.
A university spent $1.5 million to install solar panels atop a parking garage. These panels will have a capacity of 800 kilowatts (kW) and have a life expectancy of 20 years. Suppose that the discount rate is 20%, that electricity can be purchased at $0.10 per kilowatt-hour (kWh), and that the marginal cost of electricity production using the solar panels is zero.
Hint: It may be easier to think of the present value of operating the solar panels for 1 hour per year first.
Approximately how many hours per year will the solar panels need to operate to enable this project to break even?
3,850.40
5,775.60
2,310.24
3,080.32
Evaluating Break-Even Pricing in a Challenging Market Scenario
In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $50 per room per night to service. You spent $30.00 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $25 million.
If the estimated demand is 10,000 room-nights, the break-even price is
per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)
Analyzing Break-Even Pricing and Production Decisions
A firm sells 1,000 units per week. Suppose the average variable cost is $20, and the average cost is $55.
In the short run, the break-even price is
. In the long run, the break-even price is
.
Suppose the firm charges a price of $5 per unit.
Use the following table to indicate whether the firm will shut down or continue to produce in the short run and the long run.
Time Continue to Produce Shut Down
Short Run
Long Run
Analyzing Price Elasticity and Promotional Pricing Strategy
An end-of-aisle price promotion changes the price elasticity of a good from −2 to −3. Suppose the normal price is $34, which equates marginal revenue with marginal cost at the initial elasticity of –2.
What should the promotional price be when the elasticity changes to –3? (Hint: In other words, what price will equate marginal revenue and marginal cost?)
Analyzing the Cost Structure of a Business Producing 3 Million Units per Month
Individual Problems 3-7
1. A business incurs the following costs:
• Labor: $105/unit
• Materials: $20/unit
• Rent: $250,000/month
Assume the firm produces 3 million units per month.
The total variable cost, per month, is million.
The total fixed cost, per month, is million.
The total cost is million.
Evaluating Stock Valuation: Quality of Product/Service vs. Investment Potential
It is important to understand within the world of finance that “good companies” may not be “good investments.” What we mean by this is you could have a company that provides an excellent product or service, but might not be a good investment into the mid-to-long term. You may also have a company that doesn’t really provide a high quality product or service in your opinion, but in fact is (or has been) a great investment. As we look at the market and try to better understand stock valuation, try to think about an individual company that falls into one of these buckets. If you are having trouble with this, think about some of the companies you use the most in terms of products or services, and think about their annual returns. Another way you could look at this is to do a search for the highest dividend paying companies, or the companies with the highest annual returns, and see if you recognize any company on the list as having a “less than excellent” product or service. Be sure to post any data you found as your supporting evidence so your peers can also see what you are seeing. Be sure to summarize / comment on what the company’s returns are and then discuss your thoughts on how high quality their product/service is. Finally, compare the two and discuss whether you think this makes sense or not.
Application of CAPM and Beta Analysis: Evaluating the Cost of Equity for Apple Inc.
This week, we discussed the concept of the CAPM (capital asset pricing model) and beta. This week, I would like to take the opportunity to apply these concepts to real world companies.
– Select a U.S. public company (Make sure to include the company name in the title page)
– Calculate the cost of equity using the CAPM for the firm
– Evaluate the results – how realistic do you believe the result to be?
– Pull the beta from at least 2 sources – discuss why they may be different
In addition, please discuss is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain? If a companys beta were to double, would its required return also double?
Analyzing Financial Ratios of Apple Inc.
1. Using the EDGAR search engine
from the SEC website, pick a company and calculate one of the financial ratios we covered in Chapter 3. Explain the meaning of the ratio you picked and expound on what this information tells us about the company. Finally, compare the ratio you calculated to a benchmark value. This can be the same company’s ratio from the previous year, a main competitor’s ratio, or the industry average for the ratio.
2. Pro Formas do not normally have to be publicly disclosed. However, there are certain instances (some types of mergers, the disposition of part of the business, etc.) in which the SEC requires public firms to report Pro Forma Statements. Depending on the circumstances, the company may need to just disclose a Pro Forma Income Statement, while in other cases they would also need to include the Pro Forma Balance Sheet.
Using EDGAR’s Full Text search engine, find and report what a company is projecting its revenue to be in its Pro Forma. Compare it to their historical revenue, and include relevant information on why the company is reporting the projected revenue amount.