Johnny went to the mall in Daly City looking for a new pair of shoes. He found a pair of shoes that originally cost $100 but it was on clearance sale for 70% off. He also went to FootAction in the same mall and found the same pair of Nike shoes with the same original cost of $100 dollars but it was on sale for 60% off. A sales associate told Johnny that he can get an extra 10% off of the shoes if he were to join the FootAction Members Club.

Which store gives him the better deal and why?

Breakeven and Sensitivity Analysis

The goal of this exercise is to explore the trade-offs associated with the NPV of a solar collector project. The QFM for this project is:

1. Development costs are $100K/qtr for Y1.

2. Ramp-Up costs are 10K for Y1 Q4, 50K for Y2 Q1, and 5K for Y2 Q2.

3. Production costs are 20K for Y2 Q1, $22K for Y2 Q2, 25K for Y2 Q3, and 30K for Y2 Q4.

4. Marketing costs are 30K/qtr for Y2.

5. Product support costs are 15K/qtr for Y2.

6. Material costs are 5K/qtr for Y2.

7. Sales Revenue is predicted to be 300K/qtr for Y2.

8. The discount rate our company is using is 8% annually for Y1 and Y2. Original NPV to the nearest dollar = ____________

Your team has presented a project proposal to the management team charged with the responsibility for project approval. The management team has some questions (express all answers to the nearest dollar):

1. The project NPV = _________________ (same as NPV above)

2. How would a 30-percent reduction in marketing costs affect the original NPV?

3. What is the trade-off rule for the marketing cost? Trade-off rules are expressed as the (percent change in NPV/ |percent change in cost or other factor|)*100.

4. Suppose the 30-percent reduction in marketing costs also led to a 10-percent reduction in sales, how would this affect the original NPV?

5. How would a 20-percent increase in development costs (and end one quarter sooner) impact the bottom line if it allowed all other activities to begin one quarter earlier thus ending the project one quarter sooner? How would this affect the original NPV?

6. Suppose the raw-material market shifted in an adverse way and we had to pay 50 percent more for material costs? How would this affect the original NPV?

a. Karsted Air Services is now in the final year of a project. The equipment originally cost $23 million, of which 80% has been depreciated. Karsted can sell the used equipment today for $5.75 million, and its tax rate is 30%. What is the equipment's after-tax salvage value? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.

b.Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow? Do not round the intermediate calculations and round the final answer to the nearest whole number.

c.Project L costs $40,000, its expected cash inflows are $9,000 per year for 7 years, and its WACC is 10%. What is the project's payback? Round your answer to two decimal places.

1. (25 points total) Suppose you are a monopolist able to produce your chosen output at a constant average (and thus marginal) cost of ATC = MC = $5. You face a market demand curve given by Q = 53 – P or inverse demand given by P = 53 – Q, where Q is the output provided to the market by supplying firms, in this case you!

a.Please calculate the profit maximizing quantity you should supply to the market along with the price you’ll be able to charge. Calculate your firm’s profit.

D”/dQ = -2Q +48 = 0 or Q =24

24 = 53 – P, P = $29

P = TR – TC = (29)(24) – (5)(24) = $576

Profit maximizing quantity is 24, Price is 29, Profits are $576

Suppose now that a second firm enters the market. Let Q1 be the output of the first firm, yours, and Q2 the output level of the second firm. Market demand is now given by Q1 + Q2 = 53 – P or inverse demand can be expressed as P = 53 – Q1 – Q2. Also assume the second firm has adopted the same technology as you and thus has the same costs (both in total and per unit) as you. As in the Cournot model, with simultaneous choices of Qi, each firm chooses its profit maximizing level of output on the assumption that its competitor’s output is fixed at its’ profit maximizing level.

b.Find each firm’s “reaction function” or “reaction curve,” the statement that expresses a firm’s desired output in terms of its competitor’s output [i.e., Q1 = f(Q2) and Q2 = f(Q1)].

“r = 53 – 2Q1 – Q2 – 5 = 0, or Q1 = 24 – Q 2/2

Q2 = 24 – Q2/2

c.Calculate the Cournot equilibrium, the levels of each firm’s output at which each firm is doing as well as it can.

Q1 = 24 – (1/2)(24 – Q1/2)

Q1 = 16 Q2 =16

d.What are the resulting market price and profits for each firm?

P = 53 – 16 – 16 = $21

Profits (21)(16) – (5)(16) = $256

e.What tactics might your firm, the original monopolist, employ to deter the other firm from entering? How much (maximum) might you be willing to pay, this period, to employ these tactics?

The firm will need to have a better quality and quantity to stay ahead of the competition. The implementation of technology, and competitive prices will be needed to stay ahead and this will ensure a profit maximization within the industry so they won’t become bankrupt.

Now suppose there are N identical firms in the market, all with the same marginal and average costs. Using the Cournot mechanism, wherein each firm chooses its output simultaneously:

f. How much will each firm produce [Qi = f(N)] ?

g. What will be the single market price each firm will charge [P = f(N)] ?

h.Demonstrate that as N becomes large(r), the market price and profit per firm approach those that would prevail under perfect competition.