(7.7) Variable costs are the costs that change when the quantity ofchanges,when production is zero. The relationship between total variable costsand they are(VC), cost per unit of output (v), and total quantity of output (Q) can be written as:VC=during a particular time period are calledoutput in a given period are defined as the sum ofTC=Costs which do not change when the quantity of output changesTotal costs (TC) for a given level ofand(7.8) The most significant break-even point for the financial manager is the financial break-evenpoint, which is the level of sales such that theof the project equals(7.9) The degree to which a firm or project relies on fixed costs is calledfirm or project with a relatively high level of fixed costs is said to have (high/low) operatingleverage. A high level of fixed costs is associated with a large investment in plant andequipment; this situation is said to beThe degree of operating leverageA(DOL) is defined such that: Percentage change in OCF =This definition is algebraically equivalent to: DOL=1+(7.10) For a given level of output, DOL (increases/decreases/remains constant) as the size of theincrease in Q increases. When the base level of Q increase, the DOL(increases/decreases/remains constant). A capital-intensive production process has a(higher/lower) DOL than a less capital-intensive process, so that OCF and NPV increase(more/less) rapidly with an increase in sales; if sales are below the forecasted level, then NPVdecreases (more/less) rapidly for the capital-intensive process. (7.2) The NPV of an asset equals the difference between the PV of the futureproduced by an asset and thepresent value turned out to be exactly zero, we would beinvestment and not taking it.of the asset. In the unlikely event that the netbetween taking the(7.3) The IRR is the rate of return which equates the NPV of an investment toAn investment isbies if the IRR exceeds the required return that could beearned in the financial markets on investment of equal risk; the IRR on an investment is therequired return that results in a zerowhen it is used as the(7.4) Ais the impact that a given capital budgeting project might have oncash flows in another area of the firm. One of the examples of this iscash flows of a new project that come at the expense of a firm's existing projects.which is the(7.5) In the bottom-up approach, OCF =crucial to remember that this definition of OCF asonly if there is noIt isis correctplussubtracted in the calculation of net income.(7.6) The top-down approach defines operating cash flow as follows:OCF =

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changes, when production is zero. The relationship between total variable costs (7.7) Variable costs are the costs that change when the quantity of and they are. (VC), cost per unit of output (v), and total quantity of output (Q) can be written as: Costs which do not change when the quantity of output changes Total costs (TC) for a given level of and .. VC= during a particular time period are called, output in a given period are defined as the sum of : TC

changes, when production is zero. The relationship between total variable costs (7.7) Variable costs are the costs that change when the quantity of and they are. (VC), cost per unit of output (v), and total quantity of output (Q) can be written as: Costs which do not change when the quantity of output changes Total costs (TC) for a given level of and .. VC= during a particular time period are called, output in a given period are defined as the sum of : TC

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter16: The Markets For Labor, Capital, And Land

Section: Chapter Questions

Problem 12P

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