Question 1

A retailer is considering building a large store.If the local economy experiences expansion,the firm expects the store to earn a $2,000,000 profit next year.If the local economy experiences a contraction,the firm expects the store to lose $400,000 next year.Analysts estimate a 20% chance for the local economy to experience an expansion next year (hence an 80% chance for contraction).What is the expected monetary value (EMV)of building the large store?
A)$1,600,000
B)$720,000
C)$2,000,000
D)$80,000
E)$1,520,000

Accepted Answer

The answer of A retailer is considering building a large...

Question 2

Describe how EMV might be used to analyze a capacity decision.

Accepted Answer

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Question 3

A firm is weighing three capacity alternatives: small,medium,and large job shop.Whatever capacity choice is made,the market for the firm's product can be "moderate" or "strong." The probability of moderate acceptance is estimated to be 40 percent;strong acceptance has a probability of 60 percent.The payoffs are as follows.Small job shop,moderate market = $24,000;Small job shop,strong market = $54,000.Medium job shop,moderate market = $20,000;medium job shop,strong market = $64,000.Large job shop,moderate market = -$2,000;large job shop,strong market = $96,000.Which capacity choice should the firm make?

Accepted Answer

The answer of A firm is weighing three capacity alternatives:...

Question 4

The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

Accepted Answer

The net present value of $10,000 received in the future will be lower than $10,000 due to the time value of money and inflation. Therefore, it is not true that the net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

Question 5

One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

Accepted Answer

The net present value approach only takes into account the present value of future cash flows and does not consider the timing, duration, or frequency of these cash flows. As a result, investments with the same net present value may have different cash flow patterns, which can impact the risk and overall value of the investment.

Question 6

A firm is about to undertake the manufacture of a product,and it is weighing three capacity alternatives: small job shop,large job shop,and repetitive manufacturing.The small job shop has fixed costs of $3,000 per month,and variable costs of $10 per unit.The larger job shop has fixed costs of $12,000 per month and variable costs of $3 per unit.The repetitive manufacturing plant has fixed costs of $30,000 and variable costs of $1 per unit.Demand for the product is expected to be 1,000 units per month with "moderate" market acceptance,but 2,000 under "strong" market acceptance.The probability of moderate acceptance is estimated to be 60 percent;strong acceptance has a probability of 40 percent.The product will sell for $25 per unit regardless of the capacity decision.Which capacity choice should the firm make?

Accepted Answer

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Question 7

What are the four limitations of the net present value technique?

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Question 8

Net present value:
A)is gross domestic product less depreciation.
B)is sales volume less sales and excise taxes.
C)is profit after taxes.
D)ignores the time value of money.
E)is the discounted value of a series of future cash receipts.

Accepted Answer

Net present value (NPV) is the discounted value of a series of future cash receipts. It takes into account the time value of money, meaning that a dollar today is worth more than a dollar received in the future. NPV is commonly used in capital budgeting to determine the profitability of an investment by comparing the present value of cash inflows to the present value of cash outflows.

Question 9

A new machine tool is expected to generate receipts as follows: $5,000 in year one;$3,000 in year two,nothing in the next year,and $2,000 in the fourth year.At an interest rate of 6%,what is the net present value of these receipts? Is this a better net present value than $2,500 each year over four years? Explain.

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Question 10

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years.If the cost of capital is 5 percent,the net present value of this investment is:
A)greater than $80,000 but less than $130,000.
B)greater than $130,000.
C)less than $30,000.
D)impossible to calculate,because no interest rate is given.
E)impossible to calculate,because variable costs are not known.

Accepted Answer

The answer of A capacity alternative has an initial cost...

Question 11

Suppose that the market has a 70% chance of being favorable and a 30% chance of being unfavorable.A favorable market will yield a profit of $300,000,while an unfavorable market will yield a profit of $20,000.What is the expected monetary value (EMV)in this situation?

Accepted Answer

The answer of Suppose that the market has a 70%...

Question 12

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years.If the cost of capital is 5 percent,what is the approximate net present value of this investment?
A)$20,920
B)$26,160
C)$49,840
D)$70,920
E)$106,990

Accepted Answer

The answer of A capacity alternative has an initial cost...

Question 13

________ is a means of determining the discounted value of a series of future cash receipts.

Accepted Answer

The answer of ________ is a means of determining the...

Question 14

Health Care Systems of the South is about to buy an expensive piece of diagnostic equipment.The company estimates that it will generate uniform revenues of $500,000 for each of the next eight years.What is the present value of this stream of earnings,at an interest rate of 6%? What is the net present value if the machine lasts only six years,not eight? If the equipment cost $2,750,000,should the company purchase it?

Accepted Answer

The answer of Health Care Systems of the South is...

Question 15

Net present value will be greater:
A)as a fixed set of cash receipts occurs later rather than earlier.
B)if the future value of a cash flow is smaller.
C)for one end-of-year receipt of $1200 than for twelve monthly receipts of $100 each.
D)for a 4% discount rate than for a 6% discount rate.
E)All of the above are true.

Accepted Answer

The answer of Net present value will be greater:
A)as a...

Question 16

Possible decision alternatives found in capacity EMV problems are future demands or market favorability.

Accepted Answer

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Quiz 20: Capacity and Constraint Management

Describe how EMV might be used to analyze a capacity decision.

The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

What are the four limitations of the net present value technique?

Net present value:

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years.If the cost of capital is 5 percent,the net present value of this investment is:

Suppose that the market has a 70% chance of being favorable and a 30% chance of being unfavorable.A favorable market will yield a profit of $300,000,while an unfavorable market will yield a profit of $20,000.What is the expected monetary value (EMV)in this situation?

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years.If the cost of capital is 5 percent,what is the approximate net present value of this investment?

________ is a means of determining the discounted value of a series of future cash receipts.

Net present value will be greater:

Possible decision alternatives found in capacity EMV problems are future demands or market favorability.