Chapter 6 Homework

Problem 6A-8 High-Low Method; Predicting Cost [LO6-10]

Nova Company’s total overhead cost at various levels of activity are presented below:

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $215,460 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $215,460 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 41,000 machine-hours?

Needs to document an amusement park ride. For example: Round rotating cylinder where the floor drops out. The information can come from any online website. Needs to know the radius and speed at which the ride needs to rotate so that you don't fall?

Calculate the coefficient of static friction for this ride also

Based on recent data, there are on average 1.3 days per winter where snowfall reaches more than 6 inches in Central Park, New York City. We’ll call these “snow days”.

Assume that there were more than 2 “snow days” this winter. What is the chance that exactly 4 such days occur?

A tourist from the US spends three nights in a hotel in Amsterdam Which statement(s) is (are) true?

a. This increases GDP of the Netherlands and decreases net exports of the US.

b. This increases GDP of the Netherlands and increase consumption of the US.

c. This increases consumption of the US, but decreases net exports of the US.

d. All of the above are correct

The food and beverage department and its housekeeping counterpart employ the vast majority of the employees in a full-service hotel. These departments are very labor-intensive because it is not practical to use technology to replace human workers in these areas. To what extent do you think technology will replace employees in the food and beverage department in the future? Why?

In the list below tell me whether it’s a private good, public good, common resources or club resources. Explain.

Fish in Beaverkill stream in Roscoe NY

NYC Central Park
NYC water from the Catskill Mountains

Basic research on cancer drug

Radio broadcasting system

Cable television signals

Please answer each question in 350-500 words.

How have you observed/experienced diversity in the work place(Marriott Hotel)? This can be co-worker to co-worker, co-worker to guest, etc. These different groups include male/female, ages, sexual orientation, race, socioeconomic status, etc.

13-7: Real Options – Nevada Enterprise is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company’s plan is to spend another $5 million today (t = 0). To build a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year’s legislative session. If the tax is imposed, h the hotel is expected to produce cash flows of $600, 000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of $1, 200, 000 at the end of each of the next 15 years. The project has a 12% WACC. Assume at the outset that the company does not have the option to delay the project.  

a. What is the project’s expected NPV If the tax is imposed?  

b. What is the project’s expected NPV if the tax is not imposed?  

c. Given that there is a 50% chance that the tax will be imposed, what is the project’s expected NPV if management proceeds  

d. Although the company does not have an option to delay construction, it does have the option to abandon the project 1 year from now if the tax is imposed. If it abandons the project, it will sell the complete property 1 year from now at an expected price of $6 million after taxes. Once the project is abandoned, the company will no longer receive any cash flows. Assuming that all cash flows are discounted at 12%, will the existence of this abandonment option affect the company’s decision to proceed with the project today? Explain.  

e. Finally, assume that there is no option to abandon or delay the project, but that the company has an option to purchase an adjacent property in 1 year at price of $1.5 million (outflow at t =1). If the tourism tax is imposed, the expected net present value of developing this property (as of t =1) will be only $300, 000 (so it doesn’t make sense to purchase the property for $1.5 million. However, if the tax is not imposed, the expected net present value of the future opportunities from developing the property will be $4 million (as of t=1). Thus, under the scenarios, it makes sense to purchase the property for $.5 million (at t=1). Assume that these cash flows are discounted at 12%, and the probability that the tax will be imposed is still 50%. What is the most the company would pay today (t=0) for the $1.5 million purchase options (at t=1) for the adjacent property?  

Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company’s plan is to spend another $5 million today (t = 0) to build a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year’s legislative session. If the tax is imposed, the hotel is expected to produce cash flows of $500,000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of $1,400,000 at the end of each of the next 15 years. The project has a 12% WACC. Assume at the outset that the company does not have the option to delay the project.

a. What is the project’s expected NPV if the tax is imposed?

b. What is the project’s expected NPV if the tax is not imposed?

c. Given that there is a 55% chance that the tax will be imposed, what is the project’s expected NPV if management proceeds with it today?

d. Although the company does not have an option to delay construction, it does have the option to abandon the project 1 year from now if the tax is imposed. If it abandons the project, it will sell the complete property 1 year from now at an expected price of $6 million after taxes. Once the project is abandoned, the company will no longer receive any cash flows. Assuming that all cash flows are discounted at 12%, will the existence of this abandonment option affect the company’s decision to proceed with the project today? Explain.

e. Finally, assume that there is no option to abandon or delay the project, but that the company has an option to purchase an adjacent property in 1 year at a price of $1.5 million (outflow at t = 1). If the tourism tax is imposed, the expected net present value of developing this property (as of t = 1) will be only $300,000 (so it doesn’t make sense to purchase the property for $1.5 million). However, if the tax is not imposed, the expected net present value of the future opportunities from developing the property will be $4 million (as of t = 1). Thus, under this scenario, it makes sense to purchase the property for $1.5 million (at t = 1). Assume that these cash flows are discounted at 12%, and the probability that the tax will be imposed is still 55%. What is the most the company would pay today (t = 0) for the $1.5 million purchase option (at t = 1) for the adjacent property?

Chapter 8 hand-in Homework
Pat I
A random sample of 15 customers’ waiting time in a bank was selected, giving the following results in minutes:

0.38
2.34
3.02
3.2
3.54
3.79
4.21
4.5
4.77
5.1
5.13
5.55
6.1
6.19
6.46

1) Based on the sample above, what is the point estimate of the true percentage (same as True Population) of customers’ waiting time in a bank?  
2) To estimate the true percentage of customers’ waiting time in a bank, how large a sample must be taken to insure the estimate is off by no more than + 2% with 99% certainty?  

3) What would happen to the sample size above if the error was increased to 4%?  

4) What would happen to the sample size in question 2 above if the error was decreased to 1%?  
Part II
A bottle of water distributor wants to estimate the amount of water contained in 1-gallon bottles purchased from a nationally known water bottling company. The water bottling company’s specifications state that the standard deviation of the amount of water is equal to 0.02 gallon. A random sample of 50 bottle is selected, and the sample mean amount of water per 1-gallon bottle is 0.995 gallon.

Construct a 99% confidence interval estimate for the population mean amount of water included in a 1-gallon bottle.

b) On the basis of these results, do you think that the distributor has a right to complaint to the water bottling company? Why?

c) Must you assume that the population amount of water per bottle is normally distributed? Explain.

Part III
In a survey of 529 travelers, 386 said that location was very important and 323 said that room quality was very important in choosing a hotel.
a) Construct a 95% confidence interval estimate for the population proportion of travelers who said that location was very important for choosing a hotel.
b) The percentage of travelers that said that location was very important for choosing a hotel is a statistic or a parameter? Explain
c) If we need to conduct a follow up study, what sample size is need to estimate the population proportion of travelers who said that location was very important for choosing a hotel with 95% confidence within ± 5%?