Economics of Enterprise Answers

Two sisters, Joan and Jocelyn decided to save money in funds that earns 14% compounded annually but on different ways. Joan decided to save by making an end-of-year deposit of P1,000 on the first year, P1,100 on the second year, P1,210 on the third year and so on increasing the next year’s deposit by 10% of the deposit in the preceding year until the end of the 10th year. Jocelyn decided to save by just making an equal deposit of P1,400 annually for 10 years. Who has more savings at the end of 10 years and by how much bigger compared to the other sister?

A factory building is located in an area subject to occasional flooding by a nearby river. You have been

brought in as a consultant to determine whether flood proofing of the building is economically justified.

The alternatives are as follows:

A. Do nothing. Damage in a moderate flood is $10,000 and in a severe flood, $25,000.

B. Alter the factory building at a cost of $15,000 to withstand moderate flooding without damage

and to withstand severe flooding with $10,000 damages.

C. Alter the factory building at a cost of $20,000 to withstand a severe flood without damage.

In any year the probability of flooding is as follows: 0.70, no flooding of the river; 0.20, moderate flooding;

and 0.10, severe flooding. If interest is 15% and a 15-year analysis period is used, what do you

recommend?

Two instructors announced that they “grade on the curve,” that is, give a fixed percentage of each of

the various letter grades to each of their classes. Their curves are as follows:

If a random student came to you and said that his object was to enroll in the class in which he could

expect the higher grade point average, which instructor would you recommend?

Annual savings due to an energy efficiency project have a most likely value of $30,000. The high

estimate of $40,000 has a probability of 0.2, and the low estimate of $20,000 has a probability of 0.30.

What is the expected value for the annual savings?

A project has a life of 10 years, and no salvage value. The firm uses an interest rate of 12% to evaluate

engineering projects. The project has an uncertain first cost and net revenue.

What is the joint probability distribution for first cost and net revenue?

A road between Fairbanks and Nome, Alaska, will have a most likely construction cost of $4 million per

mile. Doubling this cost is considered to have a probability of 30%, and cutting it by 25% is considered

to have a probability of 10%. The state’s interest rate is 8%, and the road should last 40 years. What is

the probability distribution of the equivalent annual construction cost per mile?

How would each of the following changes tend to affect the average dividend payout ratios for corporations, other things held constant? Explain your answers.

a.An increase in the personal income tax rate that is applied to dividends.

b.A rise in interest rates.

c.A decline in corporate investment opportunities.

d.Permission for corporations to deduct dividends for tax purposes as they now can do with interest charges

.e.A change in the tax code so that both realized and unrealized capital gains investors earn in any year are taxed at the same rate as dividends.

As an investor, would you rather invest in a firm that has a policy of maintaining (1) a constant payout ratio, (2) a stable, predictable dividend per share with a target dividend growth rate, or (3) a constant regular quarterly dividend plus a year-end extra payment when earnings are sufficiently high or corporate investment needs sufficiently low? Explain your answer, stating how these policies would affect your required rate of return, rs. Also, discuss how your answer might change if you were a student, a 50-year-old professional with peak earnings, or a retiree.

The table shows information about a profit maximising firm.

Output 17,000 units

Price per unit $1.75

Fixed costs $ 10,000

Variable costs per unit $1.70

Explain whether the firm should continue production.

The table shows the costs of two milk producers.

Cost per litre

Firm X $9

Firm Y $7

The price received by producers is $10 per litre. Both firms have been given quotas allowing them to produce 200 litres per day. Firm X sells its quota to firm Y.

Assuming constant costs of production and zero costs of entry and exit, calculate the price range which firm Y had to pay (per day) to buy X’s quota.