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# Choosing Investments and Projects

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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?

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