ExercisesAnswers2008 - Review Exercises Prelim #2 Answers...

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Review Exercises – Prelim #2 – Answers AEM220-2008 Prof. Pedro David Pérez You are in charge of a photocopying concessionary at a large University. There is an opportunity to buy a new machine for $12,000. Its cost per copy is $.01, and the agreed price per copy to the University is $.05. Calculate the breakeven point in dollars and in units. If your company stipulates a payback period of a year or less to consider such investments, what should be the minimum average daily copying load? Show all your calculations and assumptions. FC = $12,000 VC = $.01 Price = $.05 BEP = FC / (Price – VC) = $12,000 / ($.05 - $.01) = 300,000 copies (units) BEP = FC / (Price – VC) = $12,000 / (1 – ($.01/$.05)) = $12,000 / .8 = $15,000 Payback period is, by definition, the time it takes for the investment to be paid back. Since we want a payback period of a year, it follows that we want to have a demand of at least 300,000 copies in a year. Simplifying, 1 year ~ 300 days, and the daily demand that roughly satisfies the payback period conditions is 1000 copies / day. Dr. Aleda Roth, a prolific author, is considering starting her own publishing company. She will cal it DSI Publishing, Inc. DSI’s estimated costs are Fixed: $250,000.00 Variable cost per book: $20.00 Selling price per book: $30.00 How many books must DSI sell to break even? FC = $250,000 VC = $20 / book Price = $30 / book BEP (units) = FC / (Price – VC) = $250,000 / ($30 - $20) = 25,000 books
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Review Exercises – Prelim #2 – Answers AEM220-2008 Prof. Pedro David Pérez In addition to the costs above, Dr. Roth wants to pay herself a salary of $50,000 per year. Calculate the new breakeven point in units and dollars. What is the new payback period? Should Dr. Roth go ahead and reward herself? Why? Why not? FC = $300,000 = $250,000 + $50,000 VC = $20 / book Price = $30 / book BEP (units) = FC / (Price – VC) = $300,000 / ($30 - $20) = 30,000 books Giving herself a salary imposes on Dr. Roth the need to sell 5000 additional units of her books. In terms of making the venture successful, it probably is not a good idea. Your team outsources some statistical analyses to a consultant for a total of $2000/year. An applications vendor has offered a tailored package that, for $7500, allows us to let go of the consultant. The package, however, will be obsolete in five years. Calculate the payback period and the net present value, if the discount rate of the project is estimated at 10%. What conclusions do you reach with each criterion? Which one would you follow? What other criteria would you consider to make this decision? Payback period: Savings = $2000 / year Investment = $7500 Payback period = investment / annual savings = $7500 / $2000 = 3.75 years, or three years and nine months Net Present Value = NPV = Σ (I(t) – O(t)) / (1+i)^t = -7500 + 2000 / (1 + .1) + 2000 / (1 +.1)^2 + 2000 / (1 + .1)^3 + 2000 / (1 +.1)^4 + 2000 / (1 + .1)^5 = -7500 + 1818.18 + 1652.89 + 1502.63 + 1366.03 + 1241.84 = 81.57
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ExercisesAnswers2008 - Review Exercises Prelim #2 Answers...

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