Case Study: Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product that is expected to sell for an average price of $22 per unit and the company expects it can sell 650 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a $3 500 000 equipment that has residual value in four years of $500 000 and adding $ 850 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line Variable cost per unit: $17 Cash fixed costs per year: $450 000 Discount rate: 10% Tax Rate: 30% Do a scenario analysis with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the worst- and best-case outcomes for the project. You need to provide your results in (a) relevant tables: Worst case: Unit sales decrease by 20%; price per unit decreases by 20%; variable cost per unit increases by 20 %; cash fixed cost per year increases by $100 000 Best case: Unit sales increase by 20%; price per unit increases by 20%; variable cost per unit decreases by 20%; cash fixed cost per year decreases by $100 000 Based on the scenario analysis outcome, draw relevant conclusion about project NPV’s sensitivity.

Hugo decides to buy his Christmas gifts on Black Friday. To simplify his life, he is giving his 10 closest friends scarves for Christmas and everyone else Christmas cards. Hugo is willing to spend $200 on the 10 scarves. When he arrives at Macy’s at 5:00 A.M. on Black Friday, he discovers that scarves are on sale for $12 each. Hugo buys 10 scarves and uses the remaining $80 to buy himself a some clothes.

How much consumer surplus did Hugo receive from the tenth scarf he purchased?

a. Consumer surplus from the tenth scarf: $

b. Assuming Hugo follows the Rational Rule for Buyers, why did Hugo only purchase 10 scarves when they were on sale? Shouldn't he have purchased more since they were such a good deal compared to what he was willing to pay?

At a price of $12, Huge determined that

buying an eleventh scarf gave him less than $8 in consumer surplus.

the price exceeded his marginal cost.

buying an eleventh scarf gave him less than $12 in benefit.

buying an eleventh scarf gave him more than $12 in benefit.

Now suppose the manager at Macy’s was hoping to sell all 100 scarves Macy's had in inventory. She decided to put the scarves on sale for $10, but an employee accidently listed the sales price as $12. To the manager’s surprise, the store sold all 100 scarves at the $12 sales price.

How much producer surplus did Macy’s receive from the hundredth scarf sold?

c. Producer surplus from the hundredth scarf sold is equal to $

A share of Amazon stock is currently selling for $1,405. You plan to purchase your first share in one year in honor of your 22nd birthday. You are concerned that the price will rise by then. To hedge this risk, you enter into a forward contract to buy one share of Amazon stock in one year. Assume that the risk-free rate is 3.5% (APR, semi-annual compounding). • Calculate the appropriate price at which you can contract to buy the asset in one year. Assume continous compounding. • Assume that eight months into the contract, interest rates increased by 75bp and the AMZN stock price is $1,400. Calculate your gain or loss from the forward contract. Assume continous compounding. • Suppose that at expiration, the price of the stock is $1,500. Calculate your gain or loss from the forward contract.

Lowell Company makes and sells artistic frames for pictures. The controller is responsible for preparing the master budget and has accumulated the following information for 2020.

Lowell has a labor contract that calls for a wage increase to $9 per hour on April 1. New labor-saving machinery has been installed and will be fully operational by March 1.

Lowell expects to begin the year with 16,100 frames on hand and has a policy of carrying an end-of-month inventory of 100% of the following month’s sales, plus 50% of the second following month’s sales.

Prepare a production budget for Lowell Company by month and for the first quarter of the year.

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Prepare a direct labor budget for Lowell Company by month and for the first quarter of the year. The direct labor budget should include direct labor hours. (Round Direct labor hours per unit answers to 1 decimal place, e.g. 52.7.)

SECTION B.

ANSWER ALL THE QUESTION.

Read the Case study below and answer ALL questions in answer sheet.

A major change in the Indian economy

A major change in India has been the decrease in the primary sector and an increase in the manufacturing sector. Agriculture’s share of India’s national output has dropped from 40% in 1980 to 17% in 2010. For the first time, the primary sector is smaller than the secondary sector (manufacturing and construction). As a result, even more workers are leaving the land to work in the secondary sector.

There has been a large increase in investment in new plant and machinery in the manufacturing sector and much of this has been due to multi-national firms deciding to locate in India. In April 2008, the Indian Government passed the National Rural Employment Guarantee Act. This promised those living in the rural areas at least 100 days’ work each year at a minimum wage. A local trade union leader stated that “people here are feeling a sense of security for the first time.” A major problem for India, however, is inflation. The prices of many items have been rising significantly. The price of sugar, for example, rose by 35% in 2010. The Reserve Bank of India, the country’s central bank, has announced that it will need to change the rate of interest.

a) Explain the FOUR (4) macroeconomics policy objective.

b) Explain why workers might decide to move from the primary sector to the secondary sector of an economy.

c) What are the advantages of the Indian Government promising employment in rural areas?

d) Analyse how a change in India’s interest rate might influence its inflation rate.

e) Discuss whether it is always a benefit to a developing economy when a multi-national firm decides to locate there.

An investment pays $2,050 per year for the first 3 years, $4,100 per year for the next 3 years, and $6,150 per year the following 7 years (all payments are at the end of each year). If the discount rate is 8.75% compounding quarterly, what is the fair price of this investment?

An investment pays $2,050 per year for the first 3 years, $4,100 per year for the next 3 years, and $6,150 per year the following 7 years (all payments are at the end of each year). If the discount rate is 8.75% compounding quarterly, what is the fair price of this investment?

It is well known that most IPOs have extraordinary return on the first day of trading but under perform the general market in the next 5 years. Why do issuers intentionally under price their shares at beginning? And why do you think IPOs under perform in the long term?