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Managing Financial Crisis

Plan 1                                                                                     Plan 1

Contribution margin                                                                  Sales Volume

=55-17-4                                                                                 (55-17-1.9)

=34                                                                                         =361

=124000 x 34 = 4216000                                                           124000 x 36.1 = 4476400

a)      At a price of $56

Demand

300000-3200 x 56 =120 800

Plan 1                                                                                         Plan 2

Contribution Margin                                                                      Contribution Margin

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(56-17-4)                                                                                   (56-17-1.9)

= 35                                                                                           = 37.1

Contr = 120 800 x 35 = 4228000                                                   120800 x 37.1 = 4481680

Demand 

300000-3200 x 56 =120 800

b)      At a price of $57

Demand

3000000-3200 x 57 = 117600

Plan 1                                                                                       Plan 2

Contribution Margin                                                   nbsp;                Contribution Margin

(57-17-4)                                                                                  (57-17-1.9)

= 36                                                                                          = 38.1

Contr = 117600 x 37 = 4233600                                                    120800 x 37.1 = 4480560

1)      Calculation of NPV

Present Value of cash inflows – Present value of cash outflows

Contribution Margin                                4481680

Less Fixed cost

Less Advertising Cost                             (460000)

                                                           4021680

Add cost saving from advertisement         46000

                                                           4067680

Present value factor

 At 10% for 5 years                                 0.6209

Present value of cash flows                      2525709.247

Less initial outlay                                    1500000

NPV                                                       1025709.247

The project is viable since it has a positive NPV OF 1055709.247

2)      Payback

Payback =   Total outlay

                  Total inflows

                                               =    1500000 x 12 months

                                              4481680

                                               = 4 Months

This project is viable since it has a payback of 4 months

3)      ARR- Accounting Rate of Return

                                                    Average Profit

                                                    Average investment

Average Profit = 4021680                Averrage investment = 1500000

                             2                                                                      2

 ARR = 2010840 =2.68112

                750000

  The project is viable since the returns are 2.6 times the investment

4)      Internal Rate of Return

LDR + (HDR-LDR) X (NPV of LDR – NPV OF HDR)

                                    (NPV of LDR – NPV of HDR)

We usually take a higher rate that can give us a higher rate or a negative NPV. In this case we assume 30 %

Present value = (1 + r)n = (1 + 0.3)n     = 0.269

We assume another rate which can give us a higher NPV than 10%. We assume 5% in this case

PVIF = (1 + r)-5   = 0.783

Under   30%                                                                        Under 5%

Total Savings    4067680                                                       4067680

PVIF                   X 0.269                                                       X 0.783

                          1094205.92                                                3184993 

Less initial Outlay (1500000)                                                  (1500000)

                            405794.08                                               1684993.44

Lower Discounting Rate LDR = 5%

Required Discount Rate         = 10%

Higher Discount Rate HDR    = 30%

5 + (30 -5) X (1684993.44-1025709.247)

                         (1684993.44 + 405794.08)

 IRR = 20.11%

This means that the project is viable since the internal rate of return is 20.11% which is higher than the required rate of return of 10%. (Cost of capital)

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