# Managerial Economics Ch.1

Pages: 2 (346 words) Published: March 10, 2013
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)...