QUESTION 7 Suppose you have a personal discount rate of 11% per year what is the
ID: 2332621 • Letter: Q
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QUESTION 7 Suppose you have a personal discount rate of 11% per year what is the net present value of an investment that costs $100 today and pays you back $120 in two years? QUESTION8 Suppose a firm has fxed costs of $2500 per month. The firm's marginal cost of production are $1 per unit. The firm is able to sell 1000 units each month at $3 per unit What is the frms monthly proft/loss if the firm chooses to stay open for the month? QUESTION 9 Suppose a firm has fixed costs of $2500 per month. The firm's marginal cost of production are $1 per unit. The firm is able to sell 1000 units each month at $3 per unit. What is the firm's monthly profit/lossf the firm chooses to shut down for the month?Explanation / Answer
Q. 7)
Net present value (NPV) is the difference of present value of future cash flow and the initial investment.
Initial investment = $100
Future cash flow = FV = $120
Rate of discount = r = 0.11
Number of years = n = 2
Present value of future cash flow = FV / (1 + r) ^ n
= 120 / (1 + 0.11) ^ 2
= 120 / 1.11 ^ 2
= 120 / 1.2321
= $97.39 (rounded)
NPV = Present value of future cash flow – Initial investment
= 97.39 – 100
= -$2.61 (Answer)
Q. 8)
Since for the month the firm stays open, there would be the operation and selling.
Contribution per unit = Selling price – Marginal cost per unit
= $3 - $1
= $2
Total contribution = Contribution per unit × Units
= $2 × 1,000
= $2,000
Profit/(loss) = Total contribution – Fixed cost
= $2,000 - $2,500
= ($500)
Answer: There is a loss of $500.
Q. 9)
If the firm shuts down, there will be no operation and selling. The firm can’t ignore the fixed cost although there is shut down. The amount of fixed cost can’t be recovered through income generation; therefore, this would be a loss.
Amount of loss = $2,500 (Answer)
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