Use the information below for questions 37-40

Rocky Mountain Brewery has done an analysis of whether to continue offering a new product or
to halt operations for $250,000. The new product has expected sales at the end of this year of
$800,000 and this will continue for two years after that (3 years total). This product has created
some cannibalization worth $100,000 of sales reduction each year. COGS is $200,000 per year
and COGS related to the cannibalized product is $60,000 each year. Based on this analysis the
sales and COGS values will stay consistent for this upcoming year-end and the next two years.
Interest charges are $70,000 annually. The corporate tax rate is 25%. The equipment cost for the
project is $1,000,000 and was spent at the beginning of this year (t=0) and it has a 40% CCA
rate. Assume that at the end of year 3 the equipment is sold for $0 and does not bring any tax
consequences.

37. What is the PV of the CCA tax shield?
a. $92,349
b. $100,797
c. $142,583
d. $145,658

38. What is the Net Income in year 3?
a. $270,000
b. $306,000
c. $292,000
d. $276,000

Accounts receivable are expected to account for 7% and accounts payable are expected to
account for 8% of COGS. The networking capital will be recovered at the end of year 3. The
firm demands a 12% return on projects such as this.

39. What is the NPV of the new product introduction?
a. $18,014
b. $176,070
c. $136,070
d. $144,109

40. A comparable company for this product, Foothills Brewery Ltd., had EBIT of $40,000,
50,000 and 60,000 for the end of this year and the following two years (years as above).
Depreciation incorporated into each year’s EBIT is $300,000. The appropriate CCA rate
was also 40% on a $1M investment, there do not have an interest expense and the tax rate
was also 25%. How would you adjust the values in year 2 to receive net income that you
are able to compare to the Rocky Mountain Brewery net income in year 2? That is, what
is the NI in year 2 for the Foothills Brewery Ltd.?
a. $22,500
b. $20,900
c. -$45,500
d. $33,200

This is a firm in a perfectly competitive market. The selling price is $5.

Fill in the table

At what price will you be minimizing losses?

There are 2 ways of calculating the change in total profits. List and explain what information you would use.

6. Here is a list of five individual FICO credit scores. What is their average and standard deviation?

• 671
• 745
• 810
• 778
• 801

8. Widget Inc. Stock has the following probabilities of return. What is its mu and sigma?

• There is a 30% chance for a good economic outlook and the stock will increase by 25%
• There is a 40% chance for an okay economic outlook and the stock will increase by 5%
• There is a 30% chance for a bad economic outlook and the stocks will decline by -25%

9. The following data was obtained on two individual stocks. What is their correlation? What does the number mean?

10. You are purchasing a factory for $120,000 at a nominal rate of 10% and the terms of the agreement are for 20 equal payments to retire the debt. What is the yearly payment

7.4 Chapter 7 HW - Problem Mastery

1) Tommy wishes to determine the return on two stocks she owned in 2019.
At the beginning of the year, stock X traded for $80per share. During the year, X paid dividends of $8
At the end of the year, Xstock was worth $62
Calculate the annual rate of return, r, for X
(Enter the answer in % format without % sign -> 20.51 and not 20.51% or 0.2051)

3) Calculate the standard deviation of this scenario
Outcome 1: Recession. Probability = 40%. Return = 7.38%.
Outcome 1: Recovery. Probability = 60%. Return = 17.27%.
Answer in % terms w/o % sign and to 4 decimal places (1.2345)

11) Your stock has a β = 1.73, the expected return on the stock market is 17.3%, and the yield on T-bills is 4%.
What is the expected return on your stock?

4. A small airport has flights to only two cities, A and B. Suppose they get an average of 40 customers per
hour who want to fly to city A and 30 customers per hour who want to fly to city B. If these are independent
Poisson processes, then find the probability that
a) (3 pts) there are 7 or more customers who want to fly to city A in the next 6 minutes. Give your answer
to three decimal places.
b) (3 pts) 5 out of the next 8 customers want to fly to city A. Give your answer to three decimal places.
c) (3 pts) if 15 customers who want to fly to city B arrive in the next 30 minutes, then find the probability
that exactly four of them arrived in the first 5 minutes. Give your answer to three decimal places.

match Point is a retail sports store carrying tennis apparel and equipment. The store is at the end of its second year of operation and is struggling. A major problem is that its cost of inventory has continually increased in the past two years. In the first year of operations, the store assigned inventory costs using LIFO. A loan agreement the store has with its bank, its prime source of financing, requires the store to maintain a certain profit margin and current ratio. The store's owner is currently looking over Match Point’s preliminary financial statements for its second year. The numbers are not favorable. The only way the store can meet the required financial ratios agreed on with the bank is to change from LIFO to FIFO. The store originally decided on LIFO because of its tax advantages. The owner recalculates ending inventory using FIFO and submits those numbers and statements to the loan officer at the bank for the required bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method.

Required:

1. How does Match Point’s use of FIFO improve its net profit margin and current ratio?
2. Is the action by Match Point’s owner ethical? Please justify your answer with an explanation.

Concentrated solar power is a method of using the Sun's light to produce useful energy on Earth. A large system of mirrors collects light during the day and focuses it on a target which is raised to a high temperature. The energy delivered to the target is then used to generate steam which runs turbines to produce electricity. The mirrors do not have to be circular, and for some designs they focus light along a line rather than to a point .

Concentrated solar power is a practical alternative to direct solar "photovoltaic" electric because the efficiency is high and because the energy collected may be stored, for example in molten salts. However, it has a very significant environmental impact on wildlife because intense converging light may endanger birds and bats. A way to reduce that risk is to lower the temperature by collecting light in long cylindrical troughs.

1. Suppose you wanted to collect power sufficient for 10,000 homes, which on average use about 10,000 kilowatt hours a year each. Given a solar constant of 1.4 kW/m², at a site with 300 clear days a year, how much area would be needed to gather the power required? Assume the turbines have an efficiency of 40% and there are 8 hours a day of useful sunlight. Given that area, if it is covered by mirrors in a square array, what is the size of the square along one side in meters? Explain.

2. To save birds and avoid singed technicians, you design the array to use cylindrically shaped mirrors focusing light to a line on long pipes. In this way the delivered power is distributed over a larger target and the temperature of the target is kept low. What is the ideal shape of the mirror? If approximately that shape were a cylinder with a diameter of 4 meters, where would the pipe have to be above the mirror's surface?  

3. The source of the energy collected by this power station is the fusion of hydrogen within the Sun's core where it is converted to helium with a small loss of mass. How much mass does the Sun lose each year to deliver this energy to a solar power system on Earth?

Suppose the reaction temperature X (in °C) in a certain chemical process has a uniform distribution with

A = −9

and B = 9.(a) Compute P(X < 0).


(b) Compute

P(−4.5

< X < 4.5).


(c) Compute

P(−7

≤ X ≤ 8). (Round your answer to two decimal places.)


(d) For k satisfying

−9 < k < k + 4 < 9,

compute P(k < X < k + 4). (Round your answer to two decimal places.)