Compute the degree of operating leverage

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Q1. Project X and Y are mutually exclusive, and it is reasonable to assume indefinite life for both projects. X is a four-year project with a net present value of Tk 5,205.63. Project Y is a 6-year project with a net present value of Tk 6,278.84. The NPV estimates are based on a discount rate of 22 percent. Both projects are average risk projects.

a. Determine the equivalent annual annuity of the two projects.

b. Which project should be selected and why? (Must be the right reason).

Q2. Sugarcone corporation currently has a production volume of 500,000 per year which is expected to go up by 15% next year. The addition of volume will increase Fixed Cost by Tk 2,00,000 next year as shown in the chart below. Fill up the blank cells and compute EPS. (Interpretation needed.)

a. Compute the Degree of Operating Leverage.

b. Compute the Degree of Financial Leverage.

c. Compute the Degree of Total Leverage.

Reference no: EM132947312

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