Part A: Cost-Volume-Profit Analysis 4
1) Basic calculations 4
2) Profit-vs-volume calculations 4
3) Figure 1: Profit-volume chart 4
4) Recommendations 5
Part B: Analysis of a Capital Investment Decision 6
1) Projected yearly profit and operating cash flows ($) 6
2) Projected net cash flows ($) 6
3) Accounting rate of return (ARR) 6
4) Payback period 7
5) Discussion of ARR and payback period 7
6) Net present value (NPV) 8
7) Internal rate of return (IRR) 8
8) Working capital requirements ($) 8
9) Discussion of the effects of working capital 9
10) Conclusion and recommendations 9
Executive Summary
Part A: Cost-Volume-Profit Analysis
1) Basic calculations
Option A B C D
Description Do nothing Update machinery & production Reduce price Do both
Contribution/unit ($)
Fixed cost ($)
Breakeven (units)
Expected sales (units)
Expected profit ($)
2) Profit-vs-volume calculations
Sales (units) 0 50,000 100,000 150,000 200,000
Profit, no change ($)
Profit, machinery and production methods updated ($)
3) Figure 1: Profit-volume chart
4) Recommendations
Part B: Analysis of a Capital Investment Decision
1) Projected yearly profit and operating cash flows ($)
Year 0 1 2 3 4 5
Sales (units)
Sales revenue
Variable Expenses
Depreciation
Profit
Operating cash flow
2) Projected net cash flows ($)
Year 0 1 2 3 4 5
Initial cost
Operating cash flow
Proceeds from sale
Net cash flow
3) Accounting rate of return (ARR)
ARR (%)
4) Payback period
Year Cash flow ($) Cumulative cash flow ($)
0
1
2
3
4
5
Payback period (years):
5) Discussion of ARR and payback period
6) Net present value (NPV)
Year 0 1 2 3 4 5
Cash flow ($)
Discount factor
Present value ($)
NPV ($):
7) Internal rate of return (IRR)
IRR (%):
8) Working capital requirements ($)
Year 0 1 2 3 4 5
Sales revenue
Accounts receivable
Inventory
Accounts payable
Total working capital
Change in WC
Incremental cash flow
9) Discussion of the effects of working capital
10) Conclusion and recommendations
Sample Solution
