Assignments Show work The owner of a firm expects to make a

Assignments (Show work) The owner of a firm expects to make a profit of $10,000 for each of the next two years and to be able to sell the firm at the end of the second year for $25,000. The owner of the firm believes that the appropriate discount rate for the firm is 10 percent. Calculate the value of the firm Determine which of two investment projects a manager should choose if the discount rate for the firm is 5 percent. The first project promises a profit of $400,000 in each of the next five years, which the second project promises a profit of $120,000 in each of the next 20 years 1. 2. For problems 1 & 2 see present value material on p. 12. Present value tables are available in Appendix B of the text A man managing a photocopying establishment for $35,000 per year decides to open his own duplicating shop. His revenue during the first year of operations is $150,000 and his expenses are as follows: Salaries to hired help Suplies Rent Utilite Interest on bank loan Calculate (a) the explicit costs (b) the implicit costs, (c) the business profit, (d) economic profit and (e) the normal return on investment in this business 3. $50,000 $30,000 $25,000 $3,000 25,000

Solution

(1)

Firm value ($) = Present Worth (PW) of all future earnings

= 10,000 x P/A(10%, 2) + 25,000 x P/F(10%, 2) = 10,000 x 1.7355** + 25,000 x 0.8264**

= 17,355 + 20,660

= 38,015

(2)

PW, Project 1 ($) = 400,000 x P/A(5%, 5) = 400,000 x 4.3295** = 173,180

PW, Project 2 ($) = 120,000 x P/A(5%, 20) = 120,000 x 12.4622** = 149,546

Since Project 1 has higher PW, this project should be selected.

NOTE: As per Chegg Answering policy, first 2 questions are answered.