Part III: Scarcity, Cost-Benefit, and Opportunity Cost

1) List the THREE questions society must ask itself because of scarcity. (1.5 pts)

2) What are the potential costs and benefits of deciding to go to a 4-year university after graduation? (2 pts)

Costs:

Benefits:

3) Give a situation where you’ve had to use a cost-benefit analysis to make a decision. What were the costs and benefits? (3 pts)

Situation:

Costs:

Benefits:

4) Tyler received $100 for his birthday. He chooses to buy five new video games instead of saving it for gas for a trip to Chicago he wants to take. What is the opportunity cost in this scenario? (2 pts)

5) Using the graph below, answer the following questions. (1.5 pts)

If the entrepreneur decides to make 18 goods, he can only provide ________ services.

If the entrepreneur decides to now make 22 goods, he can only provide _______ services, which makes his opportunity cost ________________________.

Project management

Expediting a Project

Consider the project shown above.

a)Draw the network diagram and find the critical path, time and cost for an all-normal level of project activity.

b)Calculate the crash cost-per-week assuming that all activities may be partially crashed.

c)Which tasks should be crashed to do the project in 21 weeks? What is the project cost?

d)Calculate the shortest delivery time for the project. What is the cost?

E7-5 Calculating Ending Inventory and Cost of Goods Sold Under FIFO, LIFO, and Average Cost LO7-2

Penn Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 1:

Required:

Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods. (Round "Average cost per unit" to 2 decimal places and final answers to nearest whole dollar amount.)

X-Treme vitamin company is considering two investments,both of which cost$20000.The Firm's cost of capital is 15 percent.The cash flows are as follows.

Instructions:

I. What is the payback period for each project?    Which project would you accept based on the payback period?

II.What is the discounted payback period for each project?   which project would you accept on the discounted payback criterion?

III. Calculate The NPV of each Project?     Which project would you choose based on NPV criterion ?

IV.Based on the IRR criteria which project would you choose if they were mutually exclusive?

Parramatta Scenic Cruises Pty Ltd (PSC) is a family-owned ferry business that operates on Sydney’s Parramatta River. Jane Jetson founded the company when she arrived in Australia and remains the Chief Executive Officer. Jane’s two children, Judy and Elroy, occupy key management roles in PSC. Judy Jetson is the Chief Financial Officer and Elroy Jetson is the tax accountant. PSC reported sales of $11 million for the 2017 financial year.

2) PSC is investigating a proposal to renew part of their fleet that involves replacing an existing ferry with a new, faster, 330-seat ferry costing $3 million. Judy is concerned that the net profit of the new ferry won’t generate a fast enough payback period. Therefore, she has discussed her concerns with Jane. Jane carefully explains to Judy the many reasons that profitability is not a good measure of financial success. Judy then prepares to conduct a rigorous cost-benefit analysis to ensure that the new ferry is financially viable.

3) Last month, Judy and Jane paid for a study by SeaWay Consulting P/L at a cost of $487,000 and the study concluded that the large and growing tourism market will generate sufficient demand for a new ferry. Today, PSC must decide if they will proceed with the investment in the new ferry and the associated sale of their existing ferry.

4) Elroy is really excited about the new ferry. It is a 34-metre, 119 tonnes displacement ferry capable of 35 knots with two cabins and four outside decks with a capacity for 330 passengers. According to the Australian Taxation Office (ATO) the new ferry has a sixteen-year life for taxation purposes.

5) NSW Maritime requires that all vessels have a Certificate of Operation that indicates that the vessel has been inspected and found to comply with the minimum standards set out in NSW maritime legislation. The compulsory certificate is required before PSC commences operations with the new ferry. Certification requires PSC to spend $200,000 on safety equipment. The certificate expires four years later at which time the ferry must be recertified and the safety equipment replaced at an estimated cost of $200,000. Recertification must occur every four years.

6) Because of limitations on the number of vessels at particular wharves on the Parramatta River the new ferry will replace an existing ferry. Even though the new ferry has an effective life of fifteen years, the Jetson family will operate the ferry for ten years only. Jane has arranged for the sale of the existing ferry for $300,000 today. If they don’t proceed with the new ferry PSC will continue to operate the existing ferry for ten years. The existing ferry was purchased six years ago for $2 million. Elroy states that the annual depreciation expense of $200,000 per annum is based on the ten-year tax life at the time of purchase. The existing ferry has a current book value of $800,000.

7) Elroy has suggested that because the new ferry is analysed over a ten-year time period they need to ensure that they recover all the costs they have incurred to date. Therefore, he recommends the $487,000 SeaWay Consulting fee be allocated equally over the ten-year analysis period.

8) PSC will borrow $2 million using a secured ten-year interest-only loan at an interest rate of 5% per annum to partly finance the new ferry. The loan requires annual interest payments of $100,000 starting in one year’s time. Today, inventory will need to increase by $110,000 to $610,000. Accounts receivable will increase to $750,000 from the current figure of $660,000.

9) At the moment PSC is leasing their Harris Park wharf facility to an unrelated entity for $85,000 p.a. The introduction of the new ferry will require that PSC use the wharf on a full-time basis. In this case, PSC must terminate the lease agreement. There is debate among the family members if this lease agreement is an example of a sunk cost or not.

10) At the moment, the existing ferry generates annual cash sales of $1,400,000. This sales figure is predicted to remain constant for each of the next ten years. The new ferry is predicted to generate cash sales in year one of $1.8 million in year 1 and this sales forecast is anticipated to increase by 4% per annum for the foreseeable future.

11) Judy has gathered some information regarding current and expected costs. At the moment, fixed costs are $400,000 per annum. Fixed costs would rise to $500,000 in year one with the new ferry. PSC is confident that they can reduce the increase in fixed costs by 2% p.a. after the first year. Wages expense is currently $900,000 each year and is predicted to increase to $1.4 million with the introduction of the new ferry. Judy reminds the family about the importance of incremental cash flow items when performing a financial analysis.

12) The current annual maintenance cost of the existing ferry is $63,000. The new ferry will require no maintenance in the first three years of its life because it is covered by a manufacturer’s three-year warranty. However, after the warranty expires in year 4 the annual maintenance expense will be $87,000. Jane has advised that PSC has an insurance policy that will insure any number of the company’s vessels at a fixed annual fee of $145,000.

13) It costs $175,000 a year to operate PSC’s head office and marina on the Parramatta River at Harris Park. With careful management PSC believes they will not require any additional personnel in headquarters if they purchase the new ferry. In any case, the annual head office operating expense will increase by just 2% each year.

14) The ATO classifies the safety equipment required for the Certificate of Operation as a business expense, and that expenses incurred in running PSC are tax deductible in the year the expense is incurred.

15) SeaWay Consulting’s report estimates that the new ferry will have a market value of $1 million in ten years’ time. The existing ferry has a book value of $800,000 today and can be sold for $300,000 today. PSC will use these sale proceeds to distribute a $300,000 dividend to its shareholders today. SeaWay Consulting advises that in ten years’ time the existing ferry would be worthless.

16) The company tax rate is 30% and the required rate of return is 12%.

Capital Budgeting Information

Present an itemised breakdown (and the total) for each of the following:

1. The cash flows at the start.

2. The cash flows over the life.

3. The cash flows at the end.

4. The NPV of the new ferry and an explanation of your recommendation.

Garner Strategy Institute (GSI) presents executive-level training seminars nationally. Eastern University (EU) has approached GSI to present 40 one-week seminars during 2019. This activity level represents the maximum number of seminars that GSI is capable of presenting annually. GSI staff would present the week-long seminars in various cities throughout the United States and Canada. Terry Garner, GSI’s president, is evaluating three financial options for the revenues from Eastern: accept a flat fee for each seminar, receive a percentage of Eastern’s profit before tax from the seminars, and form a joint venture to share costs and profits. Estimated costs for the 2019 seminar schedule follow: Garner Strategy Institute Eastern University Fixed costs for the year: Salaries and benefits $ 200,000 N/A * Facilities 46,000 N/A * Travel and hotel 0 $ 360,920 Other 72,000 N/A * Total fixed costs $ 318,000 $ 360,920 Variable cost per participant: Supplies and materials 0 $ 47 Marketing 0 18 Other site costs 0 35 *Eastern’s fixed costs are excluded because the amounts are not considered relevant for this decision (i.e., they will be incurred whether or not the seminars are presented). Eastern does not include these costs when calculating the profit before tax for the seminars. EU plans to charge $1,200 per participant for each 1-week seminar. It will pay all variable marketing, site costs, and materials costs. Required 1. Assume that the seminars are handled as a joint venture by GSI and EU to pool costs and revenues. a. Determine the total number of seminar participants needed to break even on the total costs for this joint venture. b. Assume that the joint venture has an effective income tax rate of 30%. How many seminar participants must the joint venture enroll to earn an after-tax income of $97,209? 2. Assume that GSI and EU do not form a joint venture, but that GSI is an independent contractor for EU. EU offers two payment options to GSI: a flat fee of $9,500 for each seminar or a fee of 40% of EU’s profit before taxes from the seminars. Compute the minimum number of participants needed for GSI to prefer the 40% fee option over the flat fee.

double figures for fixed assets because there are 2, one for gsi and one for eu

Dave (SSN 412-34-5670) and Alicia (SSN 412-34-5671) Stanley are married and retired at age 51. The couple’s income consists of rental property, stock investments, and royalties from an invention. They sold their large house that they had purchased six years ago for $580,000 on October 18, 2017, for $1 million. They now live in a condo at 101 Magnolia Lane, Suite 15, Highland Park, FL 33853.

The rental property is an apartment complex (building cost $1.5 million and was purchased January 5, 2017) with 30 units that rent for $27,000 per month and are at 90% occupancy.

The following information is also for the year:

On January 3, 2018, Dave repurchased the exact number of shares he sold on December 29, 2017. The Stanleys paid $13,000 each quarter (four payments) in federal estimated income taxes.

Prepare Form 1040 for the Stanleys. Taxpayers had qualifying health care coverage at all times during the tax year. You will also need Schedule B, Schedule D, Schedule E, Form 4562, Form 8949 and Form 8960. (List the names of the taxpayers in the order in which they appear in the problem. Input all the values as positive numbers. Round all intermediate computations and final answers to nearest whole dollar. Instructions can be found on certain cells within the forms.)

13. During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1.5 percent, but people had been expecting 1 percent. This difference between actual and expected inflation
A. transferred wealth from the borrower to you (lender) and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected.
B. transferred wealth from the borrower to you (lender) and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected.
C. transferred wealth from you (lender) to the borrower and caused your after-tax real interest rate to be equal to what you had expected.
D. transferred wealth from you (lender) to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected.
E. transferred wealth from you (lender) to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected.

14. Which of the following statements about unexpected inflation is (are) correct?
(x) High and unexpected inflation has a greater cost for those who save, than those who borrow.
(y) If inflation is more than expected, debtors (borrowers) pay a lower real interest rate to creditors (lenders) than they had anticipated.
(z) High and unexpected inflation has a greater cost for those who hold little money, than those who hold much money.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

15. which of the following statements about the U.S. is (are) correct?
(x) Between 1880 and 1896 unexpectedly low inflation transferred wealth from debtors to creditors
(y) In 1898, prospectors near the Klondike River in the Canadian Yukon discovered gold. This discovery caused an unexpected price level increase that helped debtors at the expense of creditors.
(z) An increase in the supplies of gold in the late 1890s caused an increase of money in the United States because the U.S. was tied to a gold standard.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

B&B Technologies is considering expanding its operations to include production and sales of high capacity storage devices. The assistant to the CFO has collected a lot of information which is described below. Unfortunately, some of the information may be of questionable relevance, but that is for you to decide. You have asked to present a net present value based analysis to help management decide on the desirability of getting into the storage device business. The company owns a vacant building near its current manufacturing facility; this building could be used for the expansion, or it could be leased to an interested customer and generate a lease revenue of $250,000, starting this year. The firm could increase the lease charge by 5% every year. The company has some unused equipment that has a book value of $40,000 zero and a market value of $30,000. This equipment could either be sold or be modified to produce storage devices; the modification would cost $10,000. The old equipment and modification costs would be depreciated straight-line over five years. Producing storage devices would also require the purchase of new equipment costing $900,000. For purposes of depreciation, the new equipment would be in the 7-year MACRS class. This equipment would have a useful life of six years, at the end of which it would have a scrap value of 10% of the purchase price. Producing storage devices would require an ongoing investment in working capital. Net working capital is expected to be 10% of expected sales for the coming year and would vary with sales, but remain at 10% of expected sales for the coming year. All working capital would be recovered at the end of the six-year life of the investment. The production facility is expected to generate sales revenues of $1,000,000 in the first year; sales are expected to increase at 10% p.a. for three years and then decline by 5% p.a. over the last two years of the project. Operating costs are expected to be 40% of sales. The firm’s effective tax rate of 20% is expected to remain unchanged over the planning period, and the appropriate required rate of return for this investment is 8%. Tasks: 1. Estimate the net present value and the internal rate of return for this investment. 2. Now suppose the following changes occur: (i) Sales in the first year turn out to be $900,000, (ii) the CGS to sales ratio is 45%, (iii) the NWC to sales ratio is 15%, (iv) the scrap value of the new equipment in year 6 is 5% of the original cost, and (v) the required rate of return is 10%. What is the net present value and the internal rate of return with all of the above changes? Should B&B Technologies get into the storage device business?