EFN $ 78.7


4.2 Full-capacity sales are equal to current sales divided by the capacity utilization. At 60 percent of capacity:

$4,250 = .60 X Full-capacity sales $7,083 = Full-capacity sales

With a sales level of $4,675, no net new fixed assets will be needed, so our earlier estimate is too high. We estimated an increase in fixed assets of $2,420 -2,200 = $220. The new EFN will thus be $78.7 - 220 = 2$141.3, a surplus. No external financing is needed in this case.

At 95 percent capacity, full-capacity sales are $4,474. The ratio of fixed assets to full-capacity sales is thus $2,200/4,474 = 49.17%. At a sales level of $4,675, we will thus need $4,675 X .4917 = $2,298.7 in net fixed assets, an increase of $98.7. This is $220 - 98.7 = $121.3 less than we originally predicted, so the EFN is now $78.7 - 121.3 = 2$42.6, a surplus. No additional financing is needed.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

II. Financial Statements and Long-Term Financial Planning

4. Long-Term Financial Planning and Growth

© The McGraw-Hill Companies, 2002

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