4. The following Table represents a firm’s short run costs.

a. Complete the missing cells in the Table (10 points).

1.Please, give the definitions of Total Cost (TC), Total Variable Cost (TVC), Total Fixed Cost (TFC), and Marginal Cost (MC). What is the “diminishing marginal utility” and “diminishing marginal returns? Explain each concept separately to see the difference between them. If you wish, you may give examples in order to empower your answer.

Illustrate the per unit cost graph. You must include average total cost, average fixed cost, average variable cost and marginal cost.

The legislature of Washingboard State adopted this statute:

There is hereby created a Power Line Routing Commission (PLRC) which shall have the authority, following public hearing and the development of an environmental and health-impact assessment, to recommend the best the location of new electrical transmis­sion corridors in this state. The Commission's action may be appealed to the PLRC Hearings Board in the state capital, and then to the Superior Court. Otherwise, the decision will be referred to the Governor’s office for consideration.

The PLRC was formed, studied power line routes, did an environ­mental and health assessment and held two public hearings. It determined that a new line should run through Hapless Valley, and that the rear access and freight-loading road leading to the back of Dubious' Used (and New!) Cars (his property) would unacceptably close to the proposed power-line corridor. It notified Dubious that this road would be closed.

He complained to the agency; a spokeswoman came to his business to chat about it. She said, “Well, just build a new access road around the side of your building--it won't cost you much.”

Meanwhile, the residents of Hapless Valley organized Residents Against Transmission Systems (RATS). Concerned about the health effects of living near high-voltage power lines, they threaten suit in Superior Court. They presented no evidence that power lines pose any threat to health.

At the public hearings, residents also complained about the through-transmission of foreign electricity (that is, transmission of electricity not generated or used within the state). They said it was bad enough to have to live near power lines, worse that the electrically coursing overhead was on its way to California. The PLRC issued a regulation banning the through transmission of electricity and mandating that only electricity for use in-state be transmitted through populated areas.

Dubious (a citizen of Washingboard) said to one of his friends in RATS: “Oh, there’s no problem with high-powered electrical transmission lines! Shoot, I was in San Francisco, California, last week and at a little local Health-Supplement Company there I bought these pills for $20: guaranteed to protect against electrical radiation by recalibrating the body’s reducto-electrical pathways. I’m taking one right now!” And he did. Ten minutes later he was sick: throwing up and watering at the eyes, and cramps. The pills were just pepper and caffeine.

1. Dubious doesn't want the back-access road closed. What arguments, if any, can he make to oppose the agency's action here?    

2. RATS sued in Superior Court to overturn the routing decision, claiming it was “ill-advised”; the better place would along Sullen Valley, two miles south, where there are many fewer houses.

            (a) Do they have standing to sue? Explain.

            (b) Assuming so, would the court agree with them that the agency's decision is "ill-advised" and overturn it? Explain.

Case Study

Eskom: our biggest threat

Eskom is by far the largest of South Africa’s many state owned companies. This near monopoly power utility is in crisis. It’s the single largest threat to South Africa’s economy, according to a former minister of finance. The Conversation Africa spoke to Adjunct Professor Rod Crompton about why this is the case and what can be done.

How is power generated and distributed in South Africa?

Electricity markets in most countries consist of three parts: generation, transmission and distribution. Most electricity is generated by using heat to boil water to create steam which in turn spins a turbine that generates electricity.

South Africa’s cheap and abundant coal resources made coal generated electricity an obvious choice for many years. Initially, power stations were owned by municipalities and large mining and industrial concerns. But as the costs of recapitalisation emerged, government was persuaded to take over responsibility for power.

Eskom is among the biggest power utilities in the world, famous for its ability to handle vast tonnages of low grade coal. Eskom accounts for over 90% of power generating capacity. Its power plants are mostly coal with one nuclear station and some pumped storage (water). Only a few minor power generators have remained outside Eskom’s fold.

More recently, international climate change pressure caused government to introduce renewable power generation through bidding rounds. These private investors were given 20 year price guarantees underwritten by government – some at exorbitant prices. Nevertheless, as these technologies became more globally popular, some of them – solar (photo voltaic) and wind power – emerged as the lowest cost generators.

All power generation is tied into Eskom’s national transmission grid that moves electricity from generation stations to demand areas. Transmission is a natural monopoly. If you want to use the transmission grid you need Eskom’s permission. Transmission lines end where high voltage power is stepped down to distribution networks until it reaches residential customers – at 220 volts. In many areas Eskom sells to municipal distributors.

So, Eskom is a vertically integrated near monopoly responsible for generation, transmission and distribution. In many countries competition between power generators has been encouraged to drive down prices. Transmission, being a natural monopoly, remains just that; but like toll roads they are open to all who obey the "road rules" and pay the toll. The same goes for distribution to a lesser extent.

Source: https://www.wits.ac.za/news/latest-news/opinion/2019/2019-02/eskom-our-biggest-threat.html SS

QUESTION 1

Apply the information in the article provided above, together with your knowledge of various market structures, to explain the market structure of Eskom in South Africa.

A computer chip manufacturer spent $2,540,000 to develop a special-purpose molding machine. The machine has been used for one year and is expected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation for this machine.

At the beginning of the second year, a machine salesperson offers a new, vastly more efficient machine. This machine will cost $2,040,000, reduce annual cash manufacturing costs from $1,840,000 to $1,040,000, and have zero disposal value at the end of 3 years. Management has decided to use the double-declining-balance (DDB) depreciation method for tax purposes for this machine if purchased. (Note: Make sure to switch to SLN depreciation in year 3 to ensure that the entire cost of the asset is written off. You may find it useful to use the VDB function in Excel to calculate depreciation charges.)

The old machine’s salvage value is $304,000 now and is expected to be $54,000 three years from now; however, no salvage value is provided in calculating straight-line (SLN) depreciation on the old machine for tax purposes. The firm’s income tax rate is 45%. The firm desires to earn a minimum after-tax rate of return of 8%. (Use Table 1 and Table 2.) (Do not round intermediate calculations.)

Required:
Note: Use the PV and NPV functions in Excel to calculate all present value amounts.
1. What is the present value of tax savings associated with depreciating the existing machine (using the straight-line method)? (Round your final answer to the nearest whole dollar.)
2. What is the present value of tax savings associated with depreciating the new machine using the double-declining-balance method? Use the VDB built-in function in Excel to calculate depreciation deductions. (Round your final answer to the nearest whole dollar.)
3. What is the present value of net after-tax cost associated with the existing machine? (Hint: there will be three items to consider.) (Round your final answer to nearest whole dollar amount.)
4. What is the present value of the net after-tax cost of using the replacement (new) machine? (Round your final answer to the nearest whole dollar.)
5. What is the estimated net present value (NPV) of the decision to replace the existing machine with the new machine. (Round your final answer to the nearest whole dollar.)

Amicable Corporation is considering the issue of a new product to be added to its product mix. They hired you, a recent business graduate from MacEwan, for conducting the analysis. The production line would be set up in an unused space at the company's main plant. The plant space could be leased out to another firm at $25,000 per year. They have to buy new machinery. The approximate cost of the machine would be $200,000, with another $15,000 in shipping and handling charges. It would also cost an additional $25,000 to install the equipment. The machinery has an economic life of 6 years and would be in class 8 with a CCA rate of 30%. The Machinery is expected to have a salvage value of $95,000 after 6 years of use. The new product line would generate incremental sales of 1,200 units per year for 6 years and they are expected to grow 5.5% per year. The cost per unit is estimated in $62 per unit in the first year. Each unit can be sold of $200 in the first year. The sales price and cost per unit are bothe expected to increase by 3.2% per year due to inflation. The fixed costs are estimated to be $100,000 at the end of th1st year and would increase with inflation. To handle the new product line, the firm's net operating working capital would be an amount equal to 15% of sales reventue. The firm tax rate is 37%. There are 1000 common shares outstanding with market price of $40 each. Alsom they have 100 preferred shares with market value of $50. There are $50,000 long-term bond trading in market with an average price of $1,100 and 6 years to maturity, and 8% semi-annual coupon. Common shares of firm have a beta of 1.3 Risk free rate is 4% and expected market return is 16%. Preferred stock holders are recieveing $1 quarterly dividend. The project is considered by the financial department to be as risky as the company. The reinvestment risk is assumed to be 15%. 1) -FInd the NPV & IRR of the project by using the pro forma financial statement method to determine cash flow. -Enter the input variables in cells of their own at the top of the spread sheet (so it is easier to do sensitivity analysis calculations) - Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formular driven: do not put any numbers in equations, only cell references. - Use Excel's Built in functions wherever possible (eg. NPV and IRR functions) 2) Break Even Analysis - At what WACC rate and Unit sales price the project is going to break even based on NPV method?

A computer chip manufacturer spent $2,540,000 to develop a special-purpose molding machine. The machine has been used for one year and is expected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation for this machine.

At the beginning of the second year, a machine salesperson offers a new, vastly more efficient machine. This machine will cost $2,040,000, reduce annual cash manufacturing costs from $1,840,000 to $1,040,000, and have zero disposal value at the end of 3 years. Management has decided to use the double-declining-balance (DDB) depreciation method for tax purposes for this machine if purchased. (Note: Make sure to switch to SLN depreciation in year 3 to ensure that the entire cost of the asset is written off. You may find it useful to use the VDB function in Excel to calculate depreciation charges.)

The old machine’s salvage value is $304,000 now and is expected to be $54,000 three years from now; however, no salvage value is provided in calculating straight-line (SLN) depreciation on the old machine for tax purposes. The firm’s income tax rate is 45%. The firm desires to earn a minimum after-tax rate of return of 8%. (Use Table 1 and Table 2.) (Do not round intermediate calculations.)

Required:
Note: Use the PV and NPV functions in Excel to calculate all present value amounts.
1. What is the present value of tax savings associated with depreciating the existing machine (using the straight-line method)? (Round your final answer to the nearest whole dollar.)
2. What is the present value of tax savings associated with depreciating the new machine using the double-declining-balance method? Use the VDB built-in function in Excel to calculate depreciation deductions. (Round your final answer to the nearest whole dollar.)
3. What is the present value of net after-tax cost associated with the existing machine? (Hint: there will be three items to consider.) (Round your final answer to nearest whole dollar amount.)
4. What is the present value of the net after-tax cost of using the replacement (new) machine? (Round your final answer to the nearest whole dollar.)
5. What is the estimated net present value (NPV) of the decision to replace the existing machine with the new machine. (Round your final answer to the nearest whole dollar.)

Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $14.00 each; the fitting has a variable manufacturing cost of $8.85.

The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $8.50 each. The Brake Division, which is operating at 60% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows:

Although the $8.50 price for the X52 fitting represents a substantial discount from the regular $14.00 price, the manager of the Brake Division believes that the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard “through the grapevine” that the airplane manufacturer plans to reject his bid if it is more than $78.95 per brake unit. Thus, if the Brake Division is forced to pay the regular $14.00 price for the X52 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 60% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole.

Weller Industries uses return on investment (ROI) to measure divisional performance.

Required:

1) Assume that you are the manager of the Electrical Division. What is the minimum transfer price you will charge to supply the X52 fitting to the Brake Division? (Round your answer to 2 decimal places) Would you recommend that your division supply the X52 fitting to the Brake Division for $8.50 each as requested? Calculate the net positive effect on the company's profit per brake unit given that the Electrical Division supplies the fittings to the Brake Division and if the airplane brakes can be sold for $78.95? (Round your answer to 2 decimal places.)

In principle, within what range would that transfer price lie? (Round your answers to 2 decimal places.)

Transfer price:

Selling price of the break units:
Less:
The cost of the fittings used in the breaks:
Variable costs of the brake division excluding the fitting:

Lowest transfer price:
Highest transfer price:

In each of the following scenarios, identify the accounting conventional rule that applies.
1. The company’s vehicles, which would only have a small scrap value if the company goes into liquidation.

2. The proprietor who has supplied the business capital out of his own private bank account.

3. Electricity consumed in period 1 and paid for in period 2.

4. The proprietor who argues that the accountant has got a motor vehicle entered twice in the books of account.

5. Equipment originally purchased for GHS 500,000 which would now cost GHS 555,000.

6. A company agrees to a five-year construction contract.

7. A demand by the company’s chairman to include every detailed transaction in the presentation of the annual accounts.

8. A company borrowed $100,000 in December and will make its only payment for interest when the note comes due six months later. The total interest for the six months will be $3,600. On the December income statement, the accountant reported interest expense of $600.

9. A retailer wishes to report its merchandise inventory on its balance sheet at its retail value.

10. Near the end of the current year, a company required a customer to pay $200,000 as a deposit for work that is to begin in the following year. At the end of the current year the company reported the $200,000 as a liability on its balance sheet.

11. The creative chief executive of a corporation who is personally responsible for numerous inventions and innovations is not reported as an asset on the corporation's balance sheet.

12. A company sold merchandise of $8,000 to a customer in December. The company's sales terms require the customer to pay the company in 30 days. The company's income statement reported the sale in December.

13. A corporation pays its annual property tax bill of approximately $12,000 in one payment each December 28. During the year, the corporation's monthly income statements report Property Tax Expense of $1,000.

14. A large company purchases a $250 digital camera and expenses it immediately instead of recording it as an asset and depreciating it over its useful life.

15. Accountants might recognize losses but not gains in certain situations. For example, the company might write-down the cost of inventory, but will not write-up the cost of inventory.