Tag: homeworks and essays

20. The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.30 above full cost. Management estimates that the variable cost of the globe will be $68 per unit and fixed costs per year will be $240,000.

Assume that the quantity demanded at the price calculated in part a is only 600 units. What is the full cost of the globe with a 0.30 markup?

Wizard Corporation has analyzed their customer and order handling data for the past year and has determined the following costs:
Order processing cost per order	$7
Additional costs if order must be expedited (rushed)	$9.00
Customer technical support calls (per call)	$12
Relationship management costs (per customer per year)	$1200
In addition to these costs, product costs amount to  75%
In the prior year, Wizard had the following experience with one of its customers, Chester Company:
Sales	$16,000
Number of orders	160
Percent of orders marked rush	.70
Calls to technical support	80
Required:
Calculate the profitability of the Chester Company account.

 

21.

PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:
Direct material		$625,000
Direct labor		375,000
Variable overhead		125,000
Fixed overhead		1,500,000
Total cost		$2,625,000

 

At the start of the current year, the company received an order for 3,800 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only $130 per unit.

What will be the effect on profit of accepting the order?

 

 

22. A company has $45 per unit in variable costs and $1,200,000 per year in fixed costs. Demand is estimated to be 106,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?

2- Courts section review:

The book is courts a text/reader by Cassia Spohn, 2nd edition.

Here is a link for the book:

https://books.google.com/books?id=yesNkNeLbBQC&printsec=frontcover&dq=courts+a+text/reader+pdf&hl=en&sa=X&ved=0ahUKEwie_KDete_TAhVI_mMKHTBZAg0Q6AEIHDAA#v=onepage&q&f=true

Section Reviews: Each section review will include summaries of 6 articles/chapters. Three must come from the course readings for each section: Policing, Courts, Corrections. In addition, students must find 3 additional peer-reviewed, contemporary (within the last three years)research articles for each of the topic areas. Each summary must highlight the purpose of the article, as well as the methodology, data, and results if it is a research article. Finally, students should critique the article, discussing both the strengths and weaknesses of the argument and/ orther research design. Students are required to turn in the 6 article reviews in the form similar to annotated bibliography – think about it like summary/notes that would take up no more than one half of a single-spaced page. Beyond a traditional citation, each summary should include: 1) thesis statement/research question; 2) background (includes summary of issue and inclusion of conceptual/theoretical integration); 3) summary of the methods/analysis/findings; and, 4)conclusions (including any notable next-steps, limitations, or any other pertinent information).These are meant to serve as example study guides for the comprehensive exam. These should be4 to 6 double spaced pages in length.

(c) What can you conclude from your observation in part b?

2. Your U.S. based MNC will be paying 400,000 Swiss Francs in six months. Your economist has forecast the Swiss franc’s spot rate in six months as follows:

Probability

Future Spot Rate

20%

0.65

50%

0.60

30%

0.55

Your treasurer has identified three possible hedging alternatives

I. Six month forward contract at 0.60

II. Money market alternatives with borrowing and leaning rates in U.S. at 5% and 2% respectively; while in Switzerland at 6% and 4%

III. Six month Call options with a strike price of 0.60 are available for a premium of $0.03 per unit

IV. Six month Put options with a strike price of 0.60 are available at a premium of $0.02 per unit

If the current spot rate is $0.62, which hedging alternative is the best for your MNC? (Show all your steps for the money market hedge calculation). You can fill the following table with cash flows expected in each scenario.

Probability

Future Spot Rate

Cash flow with forward hedge

Cash flow with option hedge

Cash flow with money market hedge

20%

0.65

50%

0.60

30%

0.55

Google has invested $450 million + working capital of $50 million to convert an old paper mill in Hamina, Finland into a state-of-the-art data centre. The project has a lifespan of 10 years . The rationale for the investment is to increase capacity and position the company for a push into the cloud computing market where Amazon Web Services currently dominates.

 

 

 

1. Google’s sales of cloud computing services are $800 million in 2013. Sales revenue is expected to grow at 20 percent p.a. even without the new data centre.

 

 

 

2. It is expected that the Hamina data centre will add 3.50 percent p.a. to sales revenue. Therefore, in year 1 (2014) sales revenue would be $960 million without the new centre. With the new centre it will be 3.50 percent more, or $993.6 million. Note: this is different than simply increasing the growth rate of sales by 3.50 percent to make a total of 23.50 percent p.a. Don’t take my word for it, try it!

 

 

 

3. Wages are a variable cost. The data centre will employ 90 people in 2014. The wages cost will be $6,000,000 in 2014. Wages costs are expected to grow by 2 percent p.a. in each subsequent year.

 

 

 

4. Other variable costs associated with running the data centre will amount to $21,000,000 in 2014. These other variable costs will also grow at 2 percent p.a. in each subsequent year.

 

 

 

5. Fixed costs will amount to $2,000,000 in 2014. These are expected to grow by 3 percent p.a. in each subsequent year.

 

 

 

6. Further injections of working capital will be required in 2016 and 2019. $55,000,000 will be required in each of these years. All working capital is returned at the end of the project.

 

 

 

7. The depreciation rule that should be applied is ‘straight-line-to-zero’.

 

 

 

8. The taxation rate that should be applied throughout the analysis is the average corporate taxation rate in the United States. This is 25 percent.

 

 

 

9. If you record a negative EBIT in any given year, taxes should be set to $0.00 for that year.

 

 

 

10. The corporate finance team recommends a discount rate of 12.50 percent be used to evaluate the investment.

 

 

 

 

 

In Google’s assessment, the key to the project is the savings that it may be able to obtain on electricity. Data centres require a lot of electricity. In 2010, for example, Google consumed 2.26 terawatt hours of electricity (about the equivalent of annual usage of 200,000 households). In fact, in 2010, data centres run by companies like Microsoft, Amazon and Facebook were responsible for 1.5% of the world’s total electricity usage . Powering the internet consumes 10% of the world’s electricity each year . Google is a leader in renewable energy. 34% of its annual power consumption comes from renewable sources .

 

 

 

 

 

The data centre in Finland has a number of electricity saving features:

 

 

 

1. Finland has a moderate climate. Air conditioning is not usually necessary even on the hottest summer days . Of course, winter becomes very cold.

 

 

 

2. The facility in Hamina used to be a paper mill. When Google acquired it, the facility had a seawater intake tunnel taking in cold water from the Gulf of Finland. This now forms the heart of a seawater cooling system that further reduces the need for air conditioning units.

 

 

 

3. Usually, electricity usage suffers from ‘leakage’. Google’s data centre will run at 80% efficiency (only 20% ‘leakage’) versus an industry average of 40% (60% leakage) :

 

 

 

 

 

The standard measurement of data centre efficiency is called power usage effectiveness, or PUE. A perfect number is XXXXX meaning all the power drawn by the facility is put to use. Experts considered 2.0—indicating half the power is wasted—to be a reasonable number for a data centre. Google was getting an unprecedented 1.2.

 

 

 

 

 

3. The final efficiency feature takes advantage of the renewable energy initiatives that have been developed in many European countries over the past several decades in tandem with Scandinavia’s integrated electricity grid that connects countries like Finland with nearby Sweden. In particular, Google will access 72 MW p.a. of wind power from a facility in Sweden.

 

 

 

 

 

These efficiency measures translate into cash flows:

 

 

 

1. Google will save $48,000,000 in 2014 electricity generation costs by shifting capacity from existing data centres to Hamina. This saving is expected to grow by 11% per year. This comes from two sources. First, as electricity gradually becomes more expensive, the efficiencies become worth more in dollar terms. Second, the Finnish government will provide tax concessions for efficient electricity generation.

 

 

 

 

 

 

 

Your Task

 

 

 

1. Use the financial information given below to compute a NPV and IRR for the investment in the Hamina data centre.

 

 

 

2. Perform a ‘sensitivity analysis’ on your results by reworking the NPV and IRR calculations across a range of operating cash flows: – 20 percent, – 10 percent, + 10 percent, + 20 percent of the original operating cash flow numbers .

 

 

 

3. Drawing on your initial analysis (point 1) and your sensitivity analysis (point 2), explain whether the project is likely to create market value for Google

 

 

Before starting on this assignment, make sure to thoroughly review the required background materials. Make sure you fully understand both the basic concepts as well as how to calculate payback period, NPV, IRR, and WACC. Submit your answers in a Word document. Make sure to show your work for all quantitative questions and fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 2 will require Excel. Attach an Excel file to show your computations for Questions 1 and 2.

Case Assignment

1. The table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that pay off within four years.

For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.

	Project A	Project B
Initial Investment	$40,000	$28,000
Year	Cash Flows
1	$10,000	$10,000
2	$10,000	$13,000
3	$10,000	$5,000
4	$10,000	$5,000
5	$10,000	$6,000

2. Suppose you are planning on becoming a vendor at the arena where your favorite sports team plays. You are trying to decide between opening up a souvenir stand selling T-shirts, caps, etc., with your sports team’s logo or opening up a hot dog and beer stand. It is more expensive to open up the hot dog and beer stand because you need to purchase a license to serve alcohol and you need to spend money to comply with health department regulations. Revenue from the souvenir stand is likely to be unpredictable because fans of your favorite team tend to want to purchase hats and T-shirts only when the team is winning. Revenue from hot dogs and beer seem to be a little more steady since fans want to eat and drink regardless of whether the team is winning. Below is a table with the initial investment cost of each type of stand and the annual payments you expect over the next five years. The annual payments will be different depending on how well your team does. Therefore, you will estimate how much cash flow you will get depending on whether your team does better than expected (optimistic), the same as the past few years (most likely), and worse than expected (pessimistic). Use a discount rate of 8%.

Based on the table below, answer the following items:

A. Calculate the net present value (NPV) for each type of stand under each of the three scenarios. Calculate the range of possible NPV values for each type of stand.

B. Based on your answer to A) above and your own guesses about how well you think your favorite team will do over the next five years, which type of stand would you rather invest in?

	Souvenir Stand	Hot Dog and Beer Stand
Initial Investment	$100,000	$150,000
	Annual Cash Inflows (5 Years)
Outcome
Pessimistic	$30,000	$50,000
Most likely	$50,000	$60,000
Optimistic	$70,000	$70,000

3. Suppose you are a corn farmer in your home state. You have to decide between two projects. One project is to purchase new equipment for your farm that will help boost your profits for the next 10 years. You also find out that you can purchase a large banana farm in Brazil for the same price as the equipment, and at the current market price for bananas you will make a lot more profit than you would from purchasing new corn farming equipment. After asking around, you find out that the standard discount rate for evaluating the NPV of the farming project is 6%. Most farmers in your home state seem to use this rate successfully. However, you don’t know any other banana farmers and you don’t know too much about farming in Brazil, so you have to make a guess on an appropriate discount rate for the Brazilian banana farm. Based on the concepts from the background readings, would you say the Brazilian banana farm will need a lower or higher discount rate? A lot larger or smaller, or only a little?

4. Calculate the following:

A. The cost of equity if the risk-free rate is 2%, the market risk premium is 8%, and the beta for the company is 1.3.

B. The cost of equity if the company paid a dividend of $2 last year and is expected to grow at a constant rate of 7%. The stock price is currently $40.

C. The weighted average cost of capital (WACC) if the company has a total value of $1 million with a market value of its debt at $600,000 and a market value of its equity at $400,000. Its cost of debt is 6% and its cost of equity is 15%. The tax rate it pays is 25%.

5. Suppose you own a chain of dry cleaners and the WACC you’ve been using to make decisions on new purchases of dry cleaning equipment is a steady 9%. Recently, gambling has been made legal in your home town so you decide to expand and open up a casino. Should you use the same WACC to evaluate purchases of casino equipment? Why or why not? What are some alternatives to using the same WACC to make decisions on casino equipment? Explain your reasoning, and make references to concepts from the background readings.

Assignment Expectations

· Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.

· For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.