The Valuation Principle: The Foundation
of Financial Decision Making
A blue box (
) indicates problems available in MyFinanceLab. An asterisk (*) indicates
problems with a higher level of difficulty.
All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates problems
with a higher level of difficulty.
The benefit of the rebate is that Honda will sell more vehicles and earn a profit on each
additional vehicle sold:
Profit of $6,000 per vehicle
15,000 additional vehicles sold
The cost of the rebate is that Honda will make less on the vehicles it would have sold:
Loss of $2,000 per vehicle
40,000 vehicles that would have sold without rebate
$10 million, and offering the
rebate looks attractive.
(Alternatively, we could view it in terms of total, rather than incremental, profits. The benefit
$330 million, and the cost is $8,000/vehicle
If the shrimp from your Czech and Thai suppliers are of equal quality, you will buy the
shrimp from the supplier who offers you the lowest price. One problem is the Czech supplier
quotes you a price in koruna and the Thai supplier quotes you a price in baht. Since you will
have to convert dollars to either koruna or baht, you will buy the shrimp from the supplier who
will charge you the lowest cost in dollars.
Czech buyer’s offer in dollars
2,000,000 CZK/(25.50 CZK/USD)
Thai supplier’s offer in dollars
3,000,000 THB/(41.25 THB/USD)
You would buy the shrimp from the Thai supplier because the Thai shrimp are
$72,727)$5704 less expensive today.