Managerial Economics Ch.1

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4.) A firm contemplating an advertising campaign that promises to yield $120 one year from now for $100 spent now. Explain why the firm should not undertake the advertising campaign.

Because of the Time Value of Money; the $120 might have a Present Value that is lower than the $100 spent now, therefore the campaign would have a negative Net Present Value and should not be undertaken.

5.) Determine which of 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.

The second project should be undertaken as it has a higher Net Present Value as per the attached excel sheet analysis.

6.) Determine which if the two investment projects of problem 5 the manager should choose if the discount rate of the firm is 20 percent.

The first project should be undertaken as it has a higher Net Present Value as per the attached excel sheet analysis.

9.) A woman managing a 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 follow: _______________________________________

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 the business.

a)

Explicit Costs = $45,000 + $15,000 + $10,000 + $1,000 + $10,000

= $81,000

b)

Implicit Costs = Opportunity Cost – which is her salary foregone = $25,000

c)

= $120,000 - $81,000

= $39,000

d)

= $120,000 – ($81,000 + $25,000)...
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