Concept explainers
Videos
a)
To determine: The present value profit or loss of the deal.
Introduction:
Present value (PV):
It is the value that is in present form of money in contrast to some future amount. This is achieved when it is invested in compound interest.
The NPV is the measurement of profit that is calculated by subtracting the present values of
a)
Answer to Problem 39P
The present value profit or loss of the deal is $77,750.
Explanation of Solution
Given information:
Initial cost = $1,000,000
Salvage cost= $50,000
Interest rate = 10%
Yearly maintenance= $75,000
Yearly dues = $300,000
Number of members = 500
From the present value of $1 table,
PV annuity factor @ 10% for 0 year= 1.000
PV annuity factor @ 10% for 1 year= 0.909
PV annuity factor @ 10% for 2 year= 0.826
PV annuity factor @ 10% for 3 year= 0.751
PV annuity factor @ 10% for 4 year= 0.683
PV annuity factor @ 10% for 5 year= 0.621
Calculation of cost at year 0:
The cost at year 0 is calculated summing the initial investment and yearly maintenance and expenses.
Calculation revenue for year 5:
The revenue of year 5 is calculated by adding the yearly dues and the salvage cost.
The cost for year 1 to year 4 is $75,000. The revenue for year 1 to year 4 is $300,000.
Formula to calculate profit for each year:
Formula to calculate net present value (NPV) for each year:
Formula to calculate total profit:
Formula to calculate total net present value (NPV):
Calculation of profit for each year:
The profit is calculated by subtracting the yearly revenues with yearly cost.
Year 0 Profit:
Year 1 Profit:
Year 2 Profit:
Year 3 Profit:
Year 4 Profit:
Year 5 Profit:
Calculation of total profit:
The total profit is calculated by summing all the individual year profits.
Calculation of net present value (NPV):
The net present value for each year is calculated by multiplying the annuity factor with the respective profit.
Year 0 NPV:
Year 1 NPV:
Year 2 NPV:
Year 3 NPV:
Year 4 NPV:
Year 5 NPV:
Calculation of total net present value (NPV):
The total net present value (NPV) is calculated by summing all the individual NPV values.
Hence, the present value profit of the deal is $77,750.
b)
To determine: The special deal should be made or not made.
Introduction:
Present value (PV):
It is the value that is in present form of money in contrast to some future amount. This is achieved when it is invested in compound interest.
Net present value (NPV):
The NPV is the measurement of profit that is calculated by subtracting the present values of cash outflows and cash inflows. The NPV is used as a tool to measure the profitability of investing in a project.
b)
Answer to Problem 39P
The special deal should be made.
Explanation of Solution
Given information:
Initial cost = $0
Salvage cost= $0
Interest rate = 10%
Yearly maintenance= $0
Yearly dues = $600
From the present value of $1 table,
PV annuity factor @ 10% for 0 year= 1.000
PV annuity factor @ 10% for 1 year= 0.909
PV annuity factor @ 10% for 2 year= 0.826
PV annuity factor @ 10% for 3 year= 0.751
PV annuity factor @ 10% for 4 year= 0.683
PV annuity factor @ 10% for 5 year= 0.621
The cost for year 0 to year 5 is $0. The revenue for year 0 to year 5 is $600.
Formula to calculate profit for each year:
Formula to calculate net present value (NPV) for each year:
Formula to calculate total profit:
Formula to calculate total net present value (NPV):
Calculation of profit for each year:
The profit is calculated by subtracting the yearly revenues with yearly cost.
Year 0 Profit:
Year 1 Profit:
Year 2 Profit:
Year 3 Profit:
Year 4 Profit:
Year 5 Profit:
Calculation of total profit:
The total profit is calculated by summing all the individual year profits.
Calculation of net present value (NPV):
The net present value for each year is calculated by multiplying the annuity factor with the respective profit.
Year 0 NPV:
Year 1 NPV:
Year 2 NPV:
Year 3 NPV:
Year 4 NPV:
Year 5 NPV:
Calculation of total net present value (NPV):
The total net present value (NPV) is calculated by summing all the individual NPV values.
The present value profit of the deal is $2,274. The PV profit is less than $3,000. This deal is more worth than the health club deal.
Hence, the special must be made.
Want to see more full solutions like this?
Chapter 7 Solutions
Principles Of Operations Management
- Spectrum Hair Salon is considering expanding itsbusiness, as it is experiencing a large growth. Th e question iswhether it should expand with a bigger facility than needed,hoping that demand will catch up, or with a small facility,knowing that it will need to reconsider expanding in three years.Th e management at Spectrum has estimated the followingchances for demand:• Th e likelihood of demand being high is 0.70.• Th e likelihood of demand being low is 0.30.Estimated profi ts for each alternative are as follows:• Large expansion has an estimated profi tability of either$100,000 or $70,000, depending on whether demand turnsout to be high or low.• Small expansion has a profi tability of $50,000, assuming thatdemand is low.• Small expansion with an occurrence of high demand wouldrequire considering whether to expand further. If thebusiness expands at this point, the profi tability is expected tobe $90,000. If it does not expand further, the profi tability isexpected to be $60,000.arrow_forwardSpectrum Hair Salon is considering expanding itsbusiness, as it is experiencing a large growth. Th e question iswhether it should expand with a bigger facility than needed,hoping that demand will catch up, or with a small facility,knowing that it will need to reconsider expanding in three years.Th e management at Spectrum has estimated the followingchances for demand:• Th e likelihood of demand being high is 0.70.• Th e likelihood of demand being low is 0.30.Estimated profi ts for each alternative are as follows:• Large expansion has an estimated profi tability of either$100,000 or $70,000, depending on whether demand turnsout to be high or low.• Small expansion has a profi tability of $50,000, assuming thatdemand is low.• Small expansion with an occurrence of high demand wouldrequire considering whether to expand further. If thebusiness expands at this point, the profi tability is expected tobe $90,000. If it does not expand further, the profi tability isexpected to be $60,000.Draw a…arrow_forwardS7.20 Janelle Heinke, the owner of Ha'Peppas!, is considering a new oven in which to bake the firm's signature dish, vegetarian pizza. Oven type A can handle 20 pizzas an hour. The fixed costs associated with oven A are $20,000 and the variable costs are $2.00 per pizza. Oven B is larger and can handle 40 pizzas an hour. The fixed costs associated with oven B are $30,000 and the variable costs are $1.25 per pizza. The pizzas sell for $14 each. a) What is the break-even point for each oven? b) If the owner expects to sell 9,000 pizzas, which oven should she purchase? c) If the owner expects to sell 12,000 pizzas, which oven should she purchase? d) At what volume should Janelle switch ovens?arrow_forward
- Dawson Electronics is a manufacturer of high-tech control modules for lawn sprinkler systems. Denise, the CEO, is trying to decide if the company should develop one of the two potential new products, the Water Saver 1000 or the Greener Grass 5000. With each product, Dawson can capture a bigger market share if it chooses to expand capacity by buying additional machines. Given different demand scenarios, their probabilities of occurrence, and capacity expansion versus no change in capacity, the potential sale of each product are summarized in the included table. Click the icon to view the table. What is the expected payoff for the Water Saver 1000 and the Greener Grass 5000, with and without capacity expansion? The expected payoff for the Water Saver 1000 with the capacity expansion is $ integer.) The expected payoff for the Water Saver 1000 without the capacity expansion is $. (Enter your response as an integer.) ਗਿਆ (Enter your response as an The expected payoff for the Greener Grass…arrow_forwardEvaluate capacity alternatives using decision trees?arrow_forwardEvaluate capacity alternatives using decision tree ?arrow_forward
- Theory of Constraints for a Restaurant Taylor’s is a popular restaurant that offers customers alarge dining room and comfortable bar area. Taylor Henry, the owner and manager of the restaurant,has seen the number of patrons increase steadily over the last two years and is considering whetherand when she will have to expand its available capacity. The restaurant occupies a large home, andall the space in the building is now used for dining, the bar, and kitchen, but space is available on theproperty to expand the restaurant. The restaurant is open from 6 p.m. to 10 p.m. each night (exceptMonday) and, on average, has 24 customers enter the bar and 50 enter the dining room during each ofthose hours. Taylor has noticed the trends over the last 2 years and expects that within about 4 years,the number of bar customers will increase by 50% and the dining customers will increase by 20%.Taylor is worried that the restaurant will be not be able to handle the increase and has asked you tostudy…arrow_forward10.4 The staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic: Year Expected Net Cash Flow 0 ($100,000) 1 30,000 2 30,000 3 30,000 4 30,000 5 30,000 5 (salvage value) 20,000 The time 0 cash flow is the net investment outlay, while the final amount is the terminal cash flow. (The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows. Jefferson’s corporate cost of capital is 10 percent. What is the project’s IRR? Assuming the project has average risk, what is its NPV? Now, assume that the operating cash flows in years 1 through 5 could be as low as $20,000 or as high as $40,000. Furthermore, the salvage value cash flow at the end of year 5 could be as low as $0 or as high as $30,000. What are the worst-case and best-case IRRs? The worst-case and best-case NPVs?arrow_forwardThe Candle Company plans to open a new retail store in Portland, Maine. The store will sell specialty candles for an average of $10 each. The average variable costs per candle are as follows: Wax $4 Other additives $2 Base $1 The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) a lease of $2,500 per month; or Option B) a monthly lease cost of $2,000 plus 10% of the company's monthly sales revenue. The lease option that is more attractive for the company under its current sales expectations is option B, the fixed lease payment plus sales based commission because it results in the lowest total lease costs The indifference point is The company expects to sell approximately 400 candles per month. Requirement 2. At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof. candles. Begin by selecting the equation to determine the indifference point. (Abbreviations used" FC =…arrow_forward
- The Denver Iron & Steel Company is expanding its operations to include a new drive-in weigh station. The weigh station will be a heated/air-conditioned building with a large floor and small office. The large room will have the scales, a 15-foot counter, and several display cases for its equipment. Price of scales: 5000$, cost of the counter: 500$, Inverter AC :600$, labour cost: 15 $/hr, Overhead cost: 40% total labour cost, Benefits for labour: 4% of labour cost, Total Labour hours:220 hrs, Work stoppages: 10% of total hours Question: Using work element costing calculate the budget of this project, and create a WBS and responsibility chart for the project.arrow_forwardThe exclusive Swink Golf Driving Range has had astandard price of $15 per hour. The facility has 36 golfing stations,with average usage of 50%, 10 hours a day, 7 days a week. MorganSwink, the owner, would like to enhance revenue. He proposes newpricing at $10 per hour on weekdays and $20 per hour on weekends.He estimates that weekday usage will increase to 60% and weekendusage will remain at 500/o, even with the price increase. Variable costis a consistent $3 per hour. Which strategy is better?arrow_forwardA Town Council has decided to build a new community center to be used for conventions, concerts, and other public events, but considerable controversy surrounds the appropriate size. Many influential citizens want a large center that would be a showcase for the area, but the mayor feels that if demand does not support such a center, the community will lose a large amount of money. To provide structure for the decision process, the council narrowed the building altematives to three sizes: small, medium, and large. Everybody agreed that the critical factor in choosing the best size is the number of people who will want to use the new facility. A regional planning consultant provided demand estimates under three scenarios: worst case, base case, and best case. The worst-case scenario corresponds to a situation in which tourism drops significantly; the base-case scenario corresponds to a situation in which the town continues to attract visitors at current levels; and the best-case scenario…arrow_forward
Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,