One of Current Designs' competitive advantages is found in the ingenuity of its owner and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important components of a kayak, the seat. The “Revolution Seating System” is a one-of-a-kind, rotating axis seat that gives unmatched, fullcontact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider. Having just designed the “Revolution Seating System,” Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows. Direct materials $20/unit Direct labor $15/unit Variable overhead $12/unit Fixed overhead $20,000 Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $50 to purchase a seat from an outside vendor. Instructions (a) Prepare an incremental analysis showing whether Current Designs should make or buy the “Revolution Seating System.” (b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?

10. As CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $550 million (implying a net profit of $350 million). However, firm B (your main rival) has just announced that it is spending $150 million to pursue development of the same medicine (by a scientific method completely independent of yours). You judge that B’s chance of success is 30 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($275 million each) based on separate patents.

a. Given its vast financial resources, firm A is risk neutral. Should it undertake the $200 million R&D effort? (Use a decision tree to justify your answer.)

b. Now suppose that it is feasible for firm A to delay its R&D decision until after the result of B’s R&D effort (success or failure) is known. Is it advantageous for firm A to wait and claim this “second move”? (Use a decision tree to justify your answer.)

c. Instead, suppose that the two firms can form a joint venture to pursue either or both of their R&D programs. What is the expected profit of simultaneously pursuing both programs? Hint: Be sure to compute the probability that both efforts fail (in which case the firms’ combined loss is 200 + 150 = $350 million). Could the joint venture profitably pursue a single program?

The shareholders group claimed that the mean tenure for a chief executive office (CEO) was less than 10 years. A survey of 36 companies were sampled and the mean tenure was 9.5 years with a standard deviation of 5.3 years. Assume the data is normally distributed.

You want to formulate and test a hypothesis that can be used to challenge the validity of the claim made by the group, at a significance level of 0.010.01.

What is the test statistic for this sample?
test statistic =  (Report answer accurate to 3 decimal places.)

What is the p-value for this sample?
p-value =  (Report answer accurate to 4 decimal places.)

The p-value is...

• less than (or equal to) αα
• greater than αα

This test statistic leads to a decision to...

• reject the null
• accept the null
• fail to reject the null

As such, the final conclusion is that...

• There is sufficient evidence to warrant rejection of the claim that the population mean is less than 10.
• There is not sufficient evidence to warrant rejection of the claim that the population mean is less than 10.
• The sample data support the claim that the population mean is less than 10.
• There is not sufficient sample evidence to support the claim that the population mean is less than 10.

You have been asked to perform and present a stock valuation to the CEO prior to the annual shareholders meeting next week. The two models you have selected to value the firm are the dividend discount model and the discounted cash flow model. Explain why the estimates from the two valuation methods differ. Address the assumptions implicit in the models themselves as well as those you made during the valuation process.

For over five years, Rick was the CEO of JB Guitars Inc,
a corporation operating a chain of retail guitar stores. He
had gained tremendous practical experience and decided
to start his own business selling guitars. When he first
started working at JB Guitars, Rick agreed not to carry
on a competing business for two years after he ended his
employment with the corporation. To avoid breaching
that contract, Rick incorporated a corporation named
Generation X Guitars Inc to carry on the business. He is
the sole shareholder, director, and president. JB Guitars
claims that the new corporation is just a way of getting
around the non-competition agreement and has sued for
a court order prohibiting Generation X Guitars from
carrying a business competing with JB Guitars. Will JB
Guitars be successful?

You are the CEO (Chief Executive Officer) of a large industrial grade Group of Bakeries, the operation has been exceptionally profitable, and the Group now has a considerable amount of cash. The Board of Directors has decided to invest the money in expanding the operation rather than distributing dividends to the shareholders. The Marketing Department has identified a new market segment, of which your Group of Bakeries can get a considerable share. You decide, therefore, to build a new Production Line; you issue an RFP (Request For Proposal) for the implementation of this new Production Line.

Three Contractors submit their Proposals: one Contractor proposes a low-price Line, another proposes a medium priced one, and a third proposes a state-of-the art computer-controlled Line. Their proposals are summarized as follows:

Low Price Option

• Price: $ 1,000,000
• Operation & Maintenance: the anticipated O&M cost is $ 25,000 per year and is expected to increase, due to wear and tear, by a $ 1,000 per year
• Overhaul need : it is expected that every 5 years there will be the need of a major overhaul at a cost of $ 20,000. After each overhaul, the cost of O&M decreases to its original value ($ 25,000/yr) and then increases again at the same rate ($ 1,000/yr). No overhaul is done at the end of useful life.
• Anticipated Yearly Revenues: it is anticipated that the new production line will produce sales revenues in the amount of $ 200,000 per year, and that such revenues will increase by $ 10,000 per year
• Useful Life: the useful life of this production line is expected to be 20 years
• Salvage Value: at the end of its useful life, the line will be sold on the used market for an anticipated price of $ 50,000

Medium Price Option

• Price: $ 2,000,000
• Operation & Maintenance: the anticipated O&M cost is $ 20,000 per year and is expected to increase, due to wear and tear, by a $ 1,500 per year

• Overhaul need: it is expected that after 10 years there will be the need of a major overhaul at a cost of $ 40,000. After the overhaul, the cost of O&M decreases to its original value ($ 20,000/yr) and then increases again at the same rate ($ 1,500/yr). ). No overhaul is done at the end of useful life.
• Anticipated Yearly Revenues: it is anticipated that the new production line will produce sales revenues in the amount of $ 350,000 per year, and that such revenues will increase by $ 6,000 per year
• Useful Life: the useful life of this production line is expected to be 20 years

• Salvage Value: at the end of its useful life, the line will be sold on the used market for an anticipated price of $ 120,000

State-of-the-Art Option

• Price: $ 4,000,000
• Operation & Maintenance: the anticipated O&M cost is $ 30,000 per year and is expected to increase, due to wear and tear, by a $ 2,500 per year
• Overhaul need: this production line will not need any overhaul during its useful life
• Anticipated Yearly Revenues: it is anticipated that the new production line will produce sales revenues in the amount of $ 500,000 per year, and that such revenues will increase by $ 5,000 per year
• Useful Life: the useful life of this production line is expected to be 20 years
• Salvage Value: at the end of its useful life, the line will be sold on the used market for an anticipated price of $ 120,000

Answer the following questions, and show the calculations in support of your answers:

1. If the cost of capital for your Group of Bakeries is 7% what proposal should you choose?
2. If the cost of capital for your Group of Bakeries is 14% what proposal should you choose?
3. What cost of capital would make the Low-Price option economically identical to the Medium-Price Option?
4. What cost of capital would make the Medium-Price option economically identical to the State-of-the-art Option?
5. What cost of capital would make none of the three options economically feasible?

1. In the current economic environment, if you were the CEO of a tech firm, would you issue a cash dividend? Discuss and provide a recent example of an actual firm.
2. Discuss the most important aspect of working cpital management in terms of creating value for a firm.
3. Why are Public Offerings so voliatile? Provide real-world examples.

Equipment Purchasing

The R&R construction company’s purchasing organization with the approval of the CEO is to procure an excavator for their projects rather than outsourcing them. This is a fully loaded CAT 450 loader backhoe, priced at $300,000. The estimated life of this machine is 10 years and during that period the estimated after-tax cash flows (EATCF) are given below. The investments required rate of return is 15%.

Evaluate this investment, in terms of:

a) Average rate of Return

b) Net Present Value

c) Profitability index

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

Select the correct answer.