Exam 4: Investment Decisions: Look Ahead and Reason Back

Bidding on a Missile Program Merowak Missiles is proposing to develop its next generation Democratizer Offensive Weapon System II (DOWS II)for the US military.It expects to have to sink $1 billion into R&D and design,spend $0.5 billion building the tools and production facility that are unique to DOWS II production.It houses these in standard factory floor space that costs $1 million.Each missile has a marginal cost of $2,000.The Pentagon is considering ordering 1 million of these missiles.Merowak fears that the Pentagon will ask for a lower price after only half the missiles are produced.How could it keep itself from being victim of holdup?

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Question 1

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Bidding on a price per missile with such high relationship-specific fixed costs leaves Merowak vulnerable to holdup because these costs would be sunk at the time production commences.The common strategy is to separate the contract for the relationship-specific asset from the use of the asset.In this case,Merowak can seek three contracts: 1)an R&D contract for $1 billion to develop the missile,2)a construction contract to produce the unique tools,and 3)a production contract per missile.That way Merowak does not have to include the average fixed costs of the first two into the price of each missile.Of course,this leaves the Pentagon vulnerable to holdup because it could squander the first $1 billion and not develop the missile.

Project Delay Prescott Labs is considering developing a defibrillator product.You know that will require extensive testing and possible modification before it can be launched.Still,you know that even if it is launched two years from now,the present value of sales over the expected 10 year product lifecycle will cover these costs.But now the boys down at the lab tell you that it may not launch for three years.How does this affect your assessment of going ahead with funding the product?

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Question 2

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The delay probably implies additional costs.Even if the delay does not affect development costs,it does push the benefits further into the future.The present value of the benefits falls as each year's income gets discounted more.Both of these effects will tend to reduce the net present value of the project,making it less likely to be profitable.

Use the following setup for the next question. A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12% -What is the net present value of the investment?

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Question 3

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A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the short run?

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Question 4

Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the present value of the stream of cash flows?

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Question 5

Use the following setup for question A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit. -If the cost of capital is 5% then the net present value of the investment is

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Question 6

If the interest rate is 11%,$1500 received at the end of 12 years is worth how much today?

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Question 7

If a firm anticipates that it is at a risk of being held up,it is more likely to

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Question 8

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the short run?

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Question 9

A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should

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Question 10

Use the following setup for the next question. Pastry Paradise is looking to expand.It decides to take over Sweet Tooth,a competitive firm.The two firms have similar technology but different costs.Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced.Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced. -What is the total cost,at the level of production where Pastry Paradise is indifferent between which technology is used?

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Question 11

If the cost of capital increased to 25%,would the firm invest in the printer?

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Question 12

In order to continue operating,in the long-run a firm must

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Question 13

Use the following setup for question A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000. -The break-even quantity is

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Question 14

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is

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Question 15

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the long run?

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Question 16

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the long run,this firm is

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Question 17

Which of the following will decrease the price needed to break even?

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Question 18

Use the following setup for the next question. A manufacturing firm is deciding whether or not to invest in a new printer that needs an initial investment of $150,000.The investment would increase cash flows in the first year by $80,000 and in the second year by $75,000. -If the cost of the capital is 9%,is the investment feasible?

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Question 19

Use the following setup for question A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit. -The current break-even quantity is

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Question 20

Showing 1 - 20 of 85

A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the short run?

Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the present value of the stream of cash flows?

If the interest rate is 11%,$1500 received at the end of 12 years is worth how much today?

If a firm anticipates that it is at a risk of being held up,it is more likely to

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the short run?

A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should

If the cost of capital increased to 25%,would the firm invest in the printer?

In order to continue operating,in the long-run a firm must

Use the following setup for question A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000. -The break-even quantity is

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the long run?

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the long run,this firm is

Which of the following will decrease the price needed to break even?

The One Lessor of Business

Benefits, Costs, and Decisions

Extent How Much Decisions

Simple Pricing

Economies of Scale and Scope

Understanding Markets and Industry Changes

Market Structure and Long Run Equilibrium

Strategy: the Quest to Keep Profit From Eroding

Foreign Exchange, Trade, and Bubbles

More Realistic and Complex Pricing

Direct Price Discrimination

Strategic Games

Bargaining

Making Decisions With Uncertainty

Auctions

The Problem of Adverse Selection

The Problem of Moral Hazard

Getting Employees to Work in the Firms Best Interest

Getting Divisions to Work in the Firms Best Interest

Managing Vertical Relationships

Filters

Exam 4: Investment Decisions: Look Ahead and Reason Back

A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the short run?

​Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the present value of the stream of cash flows?

​If the interest rate is 11%,$1500 received at the end of 12 years is worth how much today?

​If a firm anticipates that it is at a risk of being held up,it is more likely to

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the short run?

​A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should

​If the cost of capital increased to 25%,would the firm invest in the printer?

​In order to continue operating,in the long-run a firm must

​Use the following setup for question A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000. -​The break-even quantity is

​A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the long run?

​A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the long run,this firm is

​Which of the following will decrease the price needed to break even?

The One Lessor of Business

Benefits, Costs, and Decisions

Extent How Much Decisions

Simple Pricing

Economies of Scale and Scope

Understanding Markets and Industry Changes

Market Structure and Long Run Equilibrium

Strategy: the Quest to Keep Profit From Eroding

Foreign Exchange, Trade, and Bubbles

More Realistic and Complex Pricing

Direct Price Discrimination

Strategic Games

Bargaining

Making Decisions With Uncertainty

Auctions

The Problem of Adverse Selection

The Problem of Moral Hazard

Getting Employees to Work in the Firms Best Interest

Getting Divisions to Work in the Firms Best Interest

Managing Vertical Relationships

Filters

Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the present value of the stream of cash flows?

If the interest rate is 11%,$1500 received at the end of 12 years is worth how much today?

If a firm anticipates that it is at a risk of being held up,it is more likely to

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the short run?

A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should

If the cost of capital increased to 25%,would the firm invest in the printer?

In order to continue operating,in the long-run a firm must

Use the following setup for question A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000. -The break-even quantity is

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is

A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the long run?

A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the long run,this firm is

Which of the following will decrease the price needed to break even?