Exercise 6 c

You’ve been assigned to analyze the profitability of Bill Clinton’s new

autobiography. The following assumptions have been made:

1. Bill is receiving a $12-million royalty.

2. The fixed cost of producing the hardcover version of the book is $1 million.
3. The variable cost of producing each hardcover book is $4.
4. The publisher’s net from book sales per hardcover unit sold is $15.
5. The publisher expects to sell 1 million hardcover copies.

6. Paperback sales will be double hardcover sales.

7. The fixed cost of producing the paperback is $100,000.
8. The variable cost of producing each paperback book is $1.
9. Publisher’s net from book sales per paperback unit sold is $4.

Use this information to answer the following questions.

1. Determine how the publisher’s before-tax profit will vary as hardcover
sales vary between 100,000 and 1,000,000 copies.

2. Determine how the publisher’s before-tax profit varies as hardcover sales

vary between 100,000 and 1,000,000 copies and the ratio of paperback to
hardcover sales varies between 1 and 2.4.

Exercise 6 d
Currently we sell 40,000 units of a product for $45. The unit variable cost of
producing the product is $5. We are thinking of cutting the product price by 30
percent. We are sure this will increase sales by an amount between 10 percent
and 50 percent. Perform a sensitivity analysis to show how profit will change as
a function of the percentage increase in sales. Ignore fixed costs.

Exercise 6 e

Let’s assume that at the end of each of the next 40 years, we will put the same
amount in our retirement fund and earn the same interest rate each year. Show
how the amount of money we will have at retirement changes as we vary our
annual contribution between $5,000 and $25,000 and the rate of interest varies
between 3 percent and 15 percent.

Exercise 6 f

The payback period for a project is the number of years needed for a project’s
future profits to pay back the project’s initial investment. A project requires a
$300 million investment at Time 0. The project yields profit for 10 years, and
Time 1 cash flow will be between $30 million and $100 million. Annual cash flow
growth will be between 5 percent and 25 percent a year. How does the project
payback depend on the Year 1 cash flow and cash flow growth rates?