a) A manager of a firm in the area of Dukagjini region is considering to knocking down the old barn to provide much needed parking space for tractors and equipment. This project would require an immediate expense of £110,000 to remove the asbestos and to knock down the barn. Building the car park would then cost £17,000. The space created would have spare capacity, which will be rented out at £45,000 (pre-tax) per year for parking and other uses. This project also lasts five years and has no residual value at the end. The farmer is able to depreciate the total cost of removing the asbestos, knocking down the building and building the car park. This is done over the five years of the project using the straight-line method. The corporate tax rate is 28%. The nominal discount rate is 3% and all cash flows are nominal values. . At the moment the farmer is paying £3,000 per year (post-tax) to park these on a neighbour’s land.
Calculate the net present value of this project.
b) An alternative is to expand its production capacities. The only possible location is an old barn owned by the farm but not utilised because of asbestos contamination. For legal reasons the building cannot be sold or leased. At a cost of £2,000, the farmer hired an environmental expert, who produced a report with detailed plans for the removal of the asbestos in compliance with environmental regulations. To refurbish the barn—including removing the chemical substances it is expected to cost £350,000. The cheesemaking equipment costs £150,000. Starting at the end of year one, cheese production is expected to yield £170,000 yearly for five years in pre-tax revenue minus cash expenses. The firm depreciates the refurbishment cost and the cost of the cheese-making equipment over the five years of the project using the straight-line method. There is no residual value at the end of the project. The corporate tax rate is 28%. The nominal discount rate is 7% and all values are nominal values.
Calculate the net present value of this project.
c) The farmer asks for your advice on how to choose between the two projects using the information in Parts (a) and (b. What would be your advice to the farmer? Explain.
d) Why might it be appropriate to use different discount rates for different projects, such as those in Parts (a) and (b)? Briefly explain.
In: Finance
Tharaldson Corporation makes a product with the following standard costs:
| Standard Quantity or Hours | Standard Price or Rate | Standard Cost Per Unit | |||||||
| Direct materials | 6.5 | ounces | $ | 2.00 | per ounce | $ | 13.00 | ||
| Direct labor | 0.2 | hours | $ | 23.00 | per hour | $ | 4.60 | ||
| Variable overhead | 0.2 | hours | $ | 6.00 | per hour | $ | 1.20 | ||
The company reported the following results concerning this product in June.
| Originally budgeted output | 2,700 | units | |
| Actual output | 2,800 | units | |
| Raw materials used in production | 19,380 | ounces | |
| Purchases of raw materials | 21,400 | ounces | |
| Actual direct labor-hours | 500 | hours | |
| Actual cost of raw materials purchases | $ | 40,660 | |
| Actual direct labor cost | $ | 12,050 | |
| Actual variable overhead cost | $ | 3,100 | |
The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased.
The variable overhead rate variance for June is:
In: Accounting
Suppose you make some income when healthy, IH = $2000, and none when sick, IS = 0, and are considering the following an insurance contract with premium, r = 540, and insurance payout when sick, q = $1800.
a. What probability of sickness would make the insurance contract actuarially fair? What would the probability of sickness need to be for the insurer to make positive profits in expectation? Explain/show your work.
b. Is this potential contract an offer of full insurance or partial insurance? Explain/show your work.
c. What is your expected income if you purchase this contract and your probability of sickness is 0.2?
d. Assume the individual’s utility over income is U(I) = √ I and has a probability of sickness, p = 0.2. Calculate your expected utility E[U(I)] (a) with the contract and (b) without the contract.
e. Is this individual risk averse? Explain. (2 points) f. Should the individual purchase this contract? Explain.
In: Economics
Which investment option should Wiley choose if he uses the Equally Likely (LaPlace) criterion?
Use this information to answer the following questions. Evaluate the following Payoff Table. Wiley is considering three investment options for a small inheritance that he just received-stocks, bonds and money markets. The return on his investment will depend on the performance of the economy, which can be strong, moderate or weak. The return for each possible combination is shown on the following table. *Note: the probabilities for each market condition are: Strong = P (0.2), Moderate = P (0.35) and Weak = P (.45). Assume Wiley will use only one investment option.
|
INVESTMENT |
Strong P(0.2) |
Average P( .35) |
Weak P(.45) |
|
Stocks |
12% |
6% |
-10% |
|
Bonds |
7% |
4% |
1% |
|
Money Market |
4% |
3% |
2% |
|
A) 4% |
||
|
B) 2% |
||
|
C) 13% |
||
|
D) 23% |
||
|
E) 12% |
In: Accounting
Table 1 below reports the present values (in £ million) of different investment projects at different interest rates in the future.
| Future interest rate | |||||||
| Project | 3.0% | 3.5% | 4.0% | 4.5% | 5.0% | 5.5% | 6.0% |
| A | 76.21 | 72.26 | 68.61 | 65.23 | 62.09 | 59.18 | 56.48 |
| B | 78.81 | 74.2 | 69.98 | 66.12 | 62.57 | 59.31 | 56.31 |
| C | 80.36 | 75.41 | 70.9 | 66.78 | 63.03 | 59.59 | 56.44 |
| D | 78.81 | 74.33 | 70.22 | 66.44 | 62.97 | 59.76 | 56.81 |
| E | 84.24 | 77.18 | 71.01 | 65.58 | 60.79 | 56.55 | 52.78 |
| probability | 0.1 | 0.15 | 0.2 | 0.2 | 0.15 | 0.1 | 0.1 |
Calculate the expected present value of each project. Which projectmaximises the expected value? Why would you choose to proceed with this one?
Calculate the maximin and the maximax criteria. Calculate the minimax regret criterion. When would this criterion be applied? Calculate the expected value of perfect information. What does it describe?
In: Statistics and Probability
Table 1 below reports the present values (in £ million) of different investment projects at different interest rates in the future.
| Future interest rate | |||||||
| Project | 3.0% | 3.5% | 4.0% | 4.5% | 5.0% | 5.5% | 6.0% |
| A | 76.21 | 72.26 | 68.61 | 65.23 | 62.09 | 59.18 | 56.48 |
| B | 78.81 | 74.2 | 69.98 | 66.12 | 62.57 | 59.31 | 56.31 |
| C | 80.36 | 75.41 | 70.9 | 66.78 | 63.03 | 59.59 | 56.44 |
| D | 78.81 | 74.33 | 70.22 | 66.44 | 62.97 | 59.76 | 56.81 |
| E | 84.24 | 77.18 | 71.01 | 65.58 | 60.79 | 56.55 | 52.78 |
| probability | 0.1 | 0.15 | 0.2 | 0.2 | 0.15 | 0.1 |
0.1 |
Calculate the expected present value of each project. Which project maximises the expected value? Why would you choose to proceed with this one? Calculate the maximin and the maximax criteria. Calculate the minimax regret criterion. When would this criterion be applied? Calculate the expected value of perfect information. What does it describe?
In: Statistics and Probability
Fluidyne Corporation manufactures and sells water filters. The economic forecasting unit of the company has supplied the following demand equation:
QB= 2000 - 5PB + 2.5PC + 0.82Y + 0.6AB
(1200) (1.5) (1.2) (0.5) (0.2)
Where,
QB=quantity sold
PB=price per unit
PC=average unit price of competitor’s product
Y=income per household
AB=advertising expenditure
R2= 0.86
S.E.E=5
Standard error of coefficients in parentheses (1200) (1.5) (1.2,) (0.5) , ( 0.2)
Given, PB=$50, PC=$45, AB=$12,500 Y=$2,000
In: Economics
Fluidyne Corporation manufactures and sells water filters. The economic forecasting unit of the company has supplied the following demand equation:
QB= 2000 - 5PB + 2.5PC + 0.82Y + 0.6AB
(1200) (1.5) (1.2) (0.5) (0.2)
Where,
QB=quantity sold
PB=price per unit
PC=average unit price of competitor’s product
Y=income per household
AB=advertising expenditure
R2= 0.86
S.E.E=5
Standard error of coefficients in parentheses (1200) (1.5) (1.2,) (0.5) , ( 0.2)
Given, PB=$50, PC=$45, AB=$12,500 Y=$2,000
In: Economics
Fluidyne Corporation manufactures and sells water filters. The economic forecasting unit of the company has supplied the following demand equation
QB= 2000 - 5PB + 2.5PC + 0.82Y + 0.6AB
(1200) (1.5) (1.2) (0.5) (0.2)
Where,
QB=quantity sold
PB=price per unit
PC=average unit price of competitor’s product
Y=income per household
AB=advertising expenditure
R2= 0.86
S.E.E=5
Standard error of coefficients in parentheses (1200) (1.5) (1.2,) (0.5) , ( 0.2)
Given, PB=$50, PC=$45, AB=$12,500 Y=$2,000
In: Economics
Fluidyne Corporation manufactures and sells water filters. The economic forecasting unit of the company has supplied the following demand equation: Points: 5
QB= 2000 - 5PB + 2.5PC + 0.82Y + 0.6AB
(1200) (1.5) (1.2) (0.5) (0.2)
Where,
QB=quantity sold
PB=price per unit
PC=average unit price of competitor’s product
Y=income per household
AB=advertising expenditure
R2= 0.86
S.E.E=5
Standard error of coefficients in parentheses (1200) (1.5) (1.2,) (0.5) , ( 0.2)
Given, PB=$50, PC=$45, AB=$12,500 Y=$2,000
In: Advanced Math