a. Draw a decision tree
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- Sheryl Sandberg and Mark Zuckerberg of Facebook are introduced in the chapter’s opening feature. Assume that they are considering two options. Plan A. Facebook would begin selling access to a premium version of its website. The new online customers would use their credit cards. The company has the capability of selling the premium service with no additional investment in hardware or software. Annual credit sales are expected to increase by $250,000. Costs associated with Plan A: Additional wages related to these new sales are $135,500; credit card fees will be 4.75% of sales; and additional recordkeeping costs will be 6% of sales. Premium service sales will reduce advertising revenues for Facebook by $8,750 annually because some customers will now only use the premium service. Plan B. The company would begin selling Facebook merchandise. It would make additional annual credit sales of $500,000. Costs associated with Plan B: Cost of these new sales is $375,000; additional recordkeeping…Suisan Fish Company must decide whether to build a small or a large warehouse at a new location, Kona. Demand at Kona can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small warehouse is built, and demand is high, the fish manager may choose to maintain the current size or to expand. The net present value of profits is $220,000 if the company chooses not to expand. However, if the firm chooses to expand, there is a 50% chance that the net present value of the returns will be $330,000 and a 50% chance the estimated net present value of profits will be $220,000. If a small warehouse is built and demand is low, there is no reason to expand and the net present value of the profits is $210,000. However, if a large warehouse is built and the demand turns out to be low, the choice is to do nothing with a net present value of $25,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability…The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business? If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment? Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits? The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?
- The owners of Tiki Tiki Land have been looking for ways to improve sales at the store. One of the proposals is to have a weekly raffle with a total prize of P10,000 per week. For every P50 worth of goods purchased, the customer shall receive a numbered ticket for the raffle. The variable cost to print and distribute the tickets has been estimated at five pesos (P5.00). promotions and other fixed costs in connection with the raffle, likewise, have been estimated at P15,000 per week. The current weekly operating results of Tiki Tiki Land are given below: Sales P1,000,000 Variable costs 700,000 Fixed cost for the week 120,000 Assuming the raffle can increase sales by 30% per week, profit will Increase by how much?Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $16,200 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $12,400 and $1,800, respectively. Alternatively, Mr. Fitch could purchase for $20,160 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $17,000 and $4,860, respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent. Required a. Determine the payback period and unadjusted rate of return (use average investment)…To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3100, and the average first-year commission for each new account opened is $4600. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account. a. Determine the equation for computing Gustin's profit per seminar, given values of the relevant parameters. Round your answers to the nearest dollar. Profit (New Accounts Opened x $ 4600 -$ 3100
- To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3000, and the average first-year commission for each new account opened is $4600. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account. Determine the equation for computing Gustin’s profit per seminar, given values of the relevant parameters. Round your answers to the nearest dollar.Profit = (New Accounts Opened × $ fill in the blank 1) – $ fill in the blank 2 What type of random variable is the number of new accounts opened? (Hint: Review Appendix 16.1 for descriptions of various types of probability distributions.)The number of new accounts opened is a random variable with fill in the blank 4 trials and fill in the blank 5 probability of a success on a single trial. Assume that the…To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3000, and the average first-year commission for each new account opened is $5800. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account. Determine the equation for computing Gustin’s profit per seminar, given values of the relevant parameters. Round your answers to the nearest dollar.Profit = (New Accounts Opened × $( ) – $ ( ) What type of random variable is the number of new accounts opened? (Hint: Review Appendix 16.1 for descriptions of various types of probability distributions.)The number of new accounts opened is a random variable with fill in the blank 4 trials and fill in the blank 5 probability of a success on a single trial. Assume that the number of new accounts…Handy Ltd is a glove manufacturer in Melbourne. The managers decide to obtain an automated machine worth $1,000,000. As a result of obtaining such a machine, there will be a $100,000 reduction in total expense. The managers are considering the following options: Option 1: Purchase the machine with existing cash at the business bank account, assuming Handy Ltd has sufficient cash at bank. Option 2: The owner contributes the machine to the business. The managers have provided you with following information prior to obtaining the machine: Sales revenue $500,000 $100,000 $400,000 $900,000 $1,500,000 $1,900,000 Net profit Total current liabilities Total liabilities Total current assets Total assets Required: Calculate the Debt (to assets) Ratio, Current Ratio and Net Profit Margin after obtaining the machine if either Option 1 or Option 2 is taken. Option 1 Option 2 Debt (to assets) Ratio Current Ratio Net Profit Margin Handy Ltd has an existing loan agreement with Hilltop Bank, which…
- Ray Smith, a gift basket retailer, has stores in three shopping centres. The average selling price of a decorated gift basket is $60, and the average cost of each sale is $36. A new shopping centre is opening where Ray wants to open a store, but he is not sure which rental option he should choose. The landlord has offered three options for the new store: 1. paying a fixed rent of $20,000 a month, or 2. paying a base rent of $14,500 a month plus 8% of monthly revenue received, or 3. paying a base rent of $7,200 plus 14% of revenue received up to a maximum rent of $30,000. Required: For each option, compute the breakeven sales and the monthly rent paid at break-even.You are the owner of a small bar, The World, and you are considering opening a bakery in a vacant area in the back of the store. You estimate that it will cost you $52,175.00 to set up the bakery and that you will generate $10,758.00 in after-tax cash flows in for the life of the store (which is expected to be 10 years.) The one concern you have is that you have limited parking; by opening the bakery you run the risk of not having enough parking for customers who enjoy your bar. You estimate that the lost sales would amount to $3,230.00 per year and that your after-tax operating margin on sales at the bar is 54.00%. If your discount rate is 14.00%, what is the NPV of opening the bakery?Shonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?