Economics Chapter1

In: Business and Management

Submitted By umairnagaria
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Q) Amcott Loses $3.5 Million; Manager Fired. Do you know why Ralph was fired?

Answer: Assuming there were no other costs associated with the project, the project’s net present value to Amcott of purchasing Magicword was;

PV = 7,000,000 + 7,000,000 + 7,000,000 - 20,000,000 (1+0.07)1 (1+0.07)2 (1+0.07)3 PV = - $ 1,629,788
This means that Ralph should have expected Amcott to lose over $1.6 million by purchasing Magicword. Ralph was not fired because of the mistakes of the company’s legal department but for his managerial incompetences.

Q2) What is the maximum amount you would pay for an asset that generates an income of $150,000 at the end of each of five years if the opportunity cost of using funds is 9 percent?

Solution:

PV = 150,000 + 150,000 + 150,000 + 150,000 + 150,000 (1+0.09)1 (1+0.09)2 (1+0.09)3 (1+0.09)4 (1+0.09)5 PV = 150,000 + 150,000 + 150,000 + 150,000 + 150,000 1.09 1.1881 1.2950 1.4115 1.5386 PV = 137,614.67 + 126,251.99 + 115,830.11 + 106,269.92 + 97,491.22 PV = $ 583,457.91

Q12) Tara is considering leaving her current job, which pays $56,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market research, she can sell about 160,000 units during the first year at a price of $20 per unit. With annual overhead costs and operating expenses amounting to $3,160,000, Tara expects a profit margin of 25 percent. This margin is 6 percent larger than that of her largest competitor, Pens, Inc.
a. If Tara decides to embark on her new venture, what will her accounting costs be during the first year of operation? Her…...

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