Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Question
Chapter 7, Problem 5CQ
Summary Introduction
To discuss: Whether the project reaches accounting break-even point, cash break-even point, or financial break-even point based on the given statement.
Statement:
A firm considers a new project which needs an (initial) primary investment with sales, variable costs, and fixed costs.
Introduction:
Break-even point refers to the point where the company incurs no loss or no profit, and it indicates the required volume of sales to cover all operating expenses.
Accounting break-even point refers to the point where the company faces zero profits.
Cash break-even point occurs when minimum revenue from sales is required to fetch the business with the positive cash flows.
Financial break-even point refers to the point of earnings before interest and taxes (EBIT), which is equal to fixed financial cost inclusive of preference dividend and interest.
Summary Introduction
To discuss: The reason for the above order.
Summary Introduction
To discuss: Whether the above mentioned order is always applicable.
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Students have asked these similar questions
Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at
which one of these break-even points?
Select one:
O a. Accounting
O b. Leveraged
O c.
Marginal
O d.
Cash
Oe. Financial
When the net present value of a project is equal to zero, the project is operating at the
Group of answer choices
minimum possible level of production.
maximum possible level of production.
financial break-even point.
cash break-even point.
accounting break-even point.
Which of the following would cause a project to have a lower net present value, thereby making the project less appealing?
A. The discount rate increases
B. The cash flows are extended over a longer period of time.
C. The investment cost decreases without affecting the expected income and life of the project.
d. The cash flows are accelerated and the project life is correspondingly shortened.
Chapter 7 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Decision Trees Ang Electronics. Inc., has...Ch. 7 - Decision Trees The manager for a growing firm is...Ch. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Financial Break-Even Niko has purchased a brand...Ch. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Project Analysis You are considering a new product...Ch. 7 - Project Analysis McGilla Golf has decided to sell...Ch. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Option to Wait Hickock Mining is evaluating when...Ch. 7 - Abandonment Decisions Allied Products, Inc., is...Ch. 7 - Prob. 24QPCh. 7 - Scenario Analysis You are the financial analyst...Ch. 7 - Scenario Analysis Consider a project to supply...Ch. 7 - Sensitivity Analysis In Problem 26, suppose youre...Ch. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Financial Break-Even The Cornchopper Company is...
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Similar questions
- What refers to the interest rate at which the present work of the cash flow on a project is zero of the interest earned by an investment? Select one: a. Return of investment b. Yield c. Rate of return d. Economic returnarrow_forward35. The relationship between the payback method and the internal rate of return is that: Group of answer choices a. The payback period is the present value factor for the IRR. b. A project whose payback period does not meet the company’s cut-off rate for payback will not meet the company’s criterion for IRR. c. A payback period of less than one-half of the life of a project will yield an IRR lower than the target rate. d. The discounted payback period is exactly the same as the IRR.arrow_forward1] Payback and Internal Rate of Return: A project has perpetual cash flows of C per period, a cost of I, and a required return of r. What is the relationship between the project’s payback and its IRR? What implications does your answer have for long-lived projects with relatively constant cash flows? 2] WHAT ARE THE PROBLEMS WITH IRR APPROACH TO CAPITAL BUDGETING? 3] COMPARE IRR WITH MIRR METHOD.arrow_forward
- Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?arrow_forwardIn considering the payback period, ____. a. it considers the time value of money in determining the maximum allowable time period b. it is based on cash flows both during and after the payback period c. it gives some indication of a project’s desirability from a liquidity viewpoint d. the maximum period allowed by a firm is a specific time period based on objective criteriaarrow_forwardA firm has two potential investment projects. The project information is summarised in the table below. Project A $670 Project B $700 Expected value of profit Standard deviation of profit Coefficient of variation of profit 175 370 0.26 0.53 Which project has a lower absolute risk level? Which project has a lower relative risk level? Which project would you advise the firm to choose? Explain your answers. ---- --- ---- ..- ---arrow_forward
- a. Find the incremental NPV for the Increased investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) b. At what level of sales will accounting profits be unchanged if the firm makes the new investment? Assume the equipment receives the same straight-line depreciation treatment as in the original example. (Hint: Focus on the project's incremental effects on fixed and variable costs.) (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) c. What is the NPV break-even point in total sales if the firm invests in the new equipment? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) d. If the Blooper project operates at accounting break-even, will net present value be positive or negative?arrow_forward9. Which of the following statements concerning the payback period, is not true? The payback period is simple to calculate and understand. The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment. The payback period ignores cash flows after the payback point has been reached. It takes account of the time value of money.arrow_forwardWhich of the following statements is true about the internal rate of return? a. It is the interest rate that sets a project's net present value at zero. b. It is the minimal acceptable interest rate on an investment. c. It is the difference between the present value of the cash inflows and outflows associated with a project. d. It is the difference between the present value of a cash outflow and the depreciation associated with an asset.arrow_forward
- 18. In a situation such as Acron's, where a one-time cost is followed by a sequence of cash flows, the internal rate of return (IRR) is the discount rate that makes the NPV equal to 0. The idea is that if the discount rate is greater than the IRR, the company will not pursue the project, but if the discount rate is less than the IRR, the project is financially attractive. a. Use Excel's Goal Seek tool to find the IRR for the Acron model. b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron's model. Of course, you should get the same IRR as in part a. c. Verify that the NPV is negative when the discount rate is slightly greater than the IRR, and that it is positive when the discount rate is slightly less thanarrow_forwardHow long does it take to recover the initial investment?arrow_forwardAt the ________ break-even point, a project’s net income equals exactly zero. a. cash b. operational c. accounting d. financial e. leveragedarrow_forward
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