Engineering Economics In an effort to ensure the safety of c

(Engineering Economics)

In an effort to ensure the safety of cell phone users, the federal communications commission (FCC) requires cell phones to have a specific absorbed radiation (SAR) number of 1.6 watts per kilogram (W/kg) of tissue or less. A new cell phone company estimates that by advertising its favorable 1.2 SAR number, it will increase sales by $1.2 million 3 months from now when its phones go on sale. At n interest rate of 20% per year compounded quarterly what is the maximum amount the company can afford to spend now for advertising in order to break even?

Solution

Assume investment for advertisement = $ C

Interest rate, r = 20% (given)

No. of times interest is compounded per year = 4

Time to reach break even , t = 3 months = 1/4 year.

Future value = Sales increase by = $ 1.2 million

So for break even point: C x ( 1 + r/n)^nt = P

After plugging all the numbers we get C =$ 0.24 million.