Choosing Investments and Projects
1. Determine
which of the two investment projects a manager should choose if the discount
rate of the firm is 10 percent. The first project promises a profit of $100,000
in each of the next four years, while the second project promises a profit of
$75,000 in each of the next six years.
2. Determine
which of two investment projects of problem 1 the manager should choose if the
discount rate of the firm is 20 percent. (Use the wealth or value of the firm
for question #2 ( theory of the firm).
3. A woman managing photocopying establishment for $25,000
per year decides to open her own duplicating place. Her revenue during the
first year of operation is $120,000, and her expenses are as follows:
Salaries to hired help $45,000
Supplies 15,000
Rent 10,000
Utilities 1,000
Interest on bank loan 10,000
Calculate (a) the explicit costs, (b) the implicit costs,
(c) the business profit (d) the economic profit, and (e) the normal return on
investment in this business
4. Given the following total-revenue function:
TR=9Q- Q2
Derive the total-revenue schedules from Q=0 to Q=6 by 1s.
5.
1. Given the
following total-cost schedule:
___Q________0_____1_____2_____3_____4_____
TC 1 12 14 15 20
( a) Derive the average- and marginal-cost schedules.
(b) Derive the total-revenue, average-revenue, and
marginal-revenue schedules from Q = 0 to Q = 4 by 1s.
Average revenue (AR) = total revenue (TR) / Q
Marginal revenue (MR) = change in total revenue / change in
Q
For example Q TR AR MR
2 14 7
3 18 6 4
Revised problem: With the total-revenue schedule of Problem
4 and the total-cost schedule of Problem 5, show how the firm determines the
profit-maximizing level of output.
6. What
effect would each of the following have on the value of the firm? (a) A new
advertising campaign increases the sales of the firm substantially. (b) A new
competitor enters the market. (c) The production department achieves a
technological breakthrough that reduces production costs. (d) The firm is
required to install pollution-control equipment. (e) The workforce votes to
unionize. (f) The rate of interest rises. (g) The rate of inflation changes.
7. How does
the danger and fear of terrorism affect managerial decisions?
8. According to Milton Friedman, Business has only on social
responsibility—to make profit (as long as it stays within the legal and moral
rules of the game established by society). Few trends could so thoroughly
undermine the very foundations of our society as the acceptance by corporate
officials of a social responsibility other than to make as much money for their
stockholders as possible. Explain why you agree or disagree with such a
statement.
9. How does the value of a businesspersons time effect his
or her decision to fly or drive on a business trip? (b) How much time should a
consumer spend on shopping (searching) for lower prices? (c) For which type of
good would you expect consumers to spend more time on comparative shopping, or
shopping for lower prices?
10. What evidence is there that companies governance failed
in the United States at the beginning of this decade? (b) How can public trust
in the American financial markets be reestablished?
