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Quantitative and Data Management

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1) A three-year extended warranty is available for a new vehicle you are purchasing. After researching your make/model, you find that you can expect no significant repair costs in the first two years but repair costs of $1,600 in year three. You could purchase the extended warranty today for $1,244.
a. Should you purchase the warranty if you have a discount rate of 4.5%, discounted annually?
b. Estimate the internal rate of return on this warranty
2) A project costs $5 million to set up, and a return of $2 million/year for the next three years is guaranteed. A project will only be accepted if the internal rate of return is greater than 14% (assuming annual discounting). Should the project be accepted? (Your answer should not rely on Excel calculations so be sure to justify with work shown.)

3) A firm is considering the purchase of one of two machines. The first (Machine A), which has an initial purchase price of $4,000, is expected to bring in revenues of $6,000, $7,500 and $5,500 respectively in the 3 years for which it will be operative. Machine B, which has an initial purchase price of $5,900, will produce revenues of $8,500, $9,500, and $7,000 and has the same three-year lifetime. Machine A will have no significant scrap value at the end of its life but Machine B is expected to have a resale value of $1,800 (sold one year after operations cease). There are operating costs associated with each machine as well. For Machine A, operational costs of $2,000, $3,200 and $2,800 are expected in the three successive years. Similarly, for Machine B, operational expenses over the three years will likely be $3,100, $3,800 and $2,800. Assuming a continuous discount rate of 8%/year, which machine should the company purchase if they can only purchase one machine?

4) Preliminary plans are underway for the construction of a new stadium for a major league baseball team. City officials question the viability of the luxury corporate boxes planned for the upper deck of the stadium. The fixed construction cost for this upper-deck area is $1.5 million and the variable cost associated with each additional box is $50,000. If corporations and selected individuals have committed to purchasing 50 luxury boxes, what is the break-even price for a luxury box?

5) A retail store in Des Moines, Iowa, can receive shipments of a particular product from Kansas City or Minneapolis. The Kansas City supplier charges a flat fee of $1,000 per shipment plus $0.20 per unit. The supplier from Minneapolis, on the other hand, charges $0.45 per unit but does not charge a flat fee. The store intends to sell the product for $1.35 per unit. Identify a condition under which the store should ship the product from Minneapolis.

Solution Summary

Quantitative and data management are examined.