16.

COMPUTATION

Formula PV = FV / (1 + i) n

PV High = 20 000 000 / (1+ 0.9) + 80 000 000 / (1+ 0.9) 2 + 300 000 000 / (1+ 0.9) 3

PV High = 20 000 000 / (1.9) + 80 000 000 / (1.9) 2 + 300 000 000 / (1.9) 3

PV High = 18, 348,623.8532 + 67, 334,399.4613 + 231, 655, 044.018

PV High = $ 317, 338, 067.22

PV Moderate = 40 000 000 / (1+ 0.9) + 80 000 000 / (1+ 0.9) 2 + 135 000 000 / (1+ 0.9)3

PV Moderate = 40 000 000 / (1.9) + 80 000 000 / (1.9) 2 + 135 000 000 / (1.9) 3

PV Moderate = 36 697 247.7064 + 67 334 399.4613 + 104 244 769.808

PV Moderate = $ 208, 276, 416.975

PV Low = 75, 000, 000 / (1+ 0.9) + 110, 000, 000 / (1+ 0.9) 2 + 118, 000, 000 / (1+ 0.9)3

PV Low = 75, 000, 000 / (1.9) + 110, 000, 000 / (1.9) 2 + 118, 000, 000 / (1.9) 3

PV Low = 68, 807, 339.4495 + 92, 584, 799.2593 + 91, 117, 65.6472

PV Low = $ 252, 509, 789.355

ANSWER:

Based from the present value of the profits from each advertising strategy, we can all agree that
higher intensity advertising has gain a lot of profits in three years. However, low intensity
advertising also gain a lot of profits especially on its first and second year exceeding the high
intensity advertising but on its third year the high intensity giving a $ 64, 288, 277.865 difference
with the low advertising. At some, point we can all agree that high intensity advertising is the
best option among all which we declined the recommendations of the team leader but using
marginal analysis, we can use all of these three intensity of adverting or the high and low
advertising only to maximize the value of the firm because they also had the great effects on our
firm profits because they increase profits.
17. GIVEN:

Current profits: 3.2 billion

Interest rate: 6 %

Formula:

PV Firm = Current Profit x (1 + g / 1 – i)

a. Profits grow at an annual rate of 9 %

PV Firm = 3, 200, 000, 000 x (1 + .9 / 1 – .6)

PV Firm = 3, 200, 000, 000 x (1.9 / 0.4)

PV Firm = 3, 200, 000, 000 x 4.75

PV Firm = 15, 200, 000, 000

b. Profits grow at an annual rate of 2 %

PV Firm = 3, 200, 000, 000 x (1 + .9 / 1 – .6)

PV Firm = 3, 200, 000, 000 x (1.2 / 0.4)

PV Firm = 3, 200, 000, 000 x -3

PV Firm = 9, 600, 000, 000

c. Profits grow at an annual rate of 0 %

PV Firm = 3, 200, 000, 000 x (1 + .0 / 1 – .6)

PV Firm = 3, 200, 000, 000 x (1 / 0.4)

PV Firm = 3, 200, 000, 000 x 2.5

PV Firm = 8, 000, 000, 000

d. Profits decline at an annual rate of 4 %

PV Firm = 3, 200, 000, 000 x (1 + -4 / 1 – .6)

PV Firm = 3, 200, 000, 000 x ( -3 / 0.4)

PV Firm = 3, 200, 000, 000 x -7.5

PV Firm = 9, 600, 000, 000

18. GIVEN:

Roth IRA – Tax deductible

Traditional IRA – Tax free

Contribution / Investments: 2,500

One time set up fee for Roth IRA: 50

Set up fee for traditional IRA: 50

Return Investment: 7%

Tax rate 19%

COMPUTATION

Roth IRA

Formula: PV = FV / (1 + i) n

PV = 2500 / (1+ 0.19) + 2500 / (1+0.19) 2 + 2500 / (1+0.19) 3 + 2500 / (1+0.19) 4

PV = 2500 / (1.19) + 2500 / (1.19) + 2500 / (1.19) + 2500 / (1.19)

PV = 2500 / (1.19) + 2500 / (1.14161) + 2500 / (1.685159) + 2500 / (2.00533921)

PV = 2 100.84033613 + 17 645.41204717 + 1 483.53953543 + 1246.67187851

PV = $ 6 596.46379724

Formula: FV = PV (1 + r) n

FV = 6 596.46379724 (1.7) 4

FV = 11, 213.9884553

Traditional IRA

PV = 2500 / (1+ 0) + 2500 / (1+0) 2 + 2500 / (1+0) 3 + 2500 / (1+0) 4

PV = 2500 / (1) + 2500 / (1) + 2500 / (1) + 2500 / (1)

PV = 2500 + 2500 + 2500 + 2500

PV = $ 10, 000

FV = 10, 000 (1 + 0.7)

FV = 10, 000 (1.7)

FV = 17, 000

Less: 19% tax rate after withdrawal

Total: 3, 230

ANSWER:

I think my client would prefer the Roth IRA because from based from the computations, she will
benefit for at least $ 11, 213.9884553 after 4 years. Although, on the traditional IRA will make
her money grow faster with a total of 17, 000 after 4 years but after she withdraws her money the
interest rate will be deducted for 19 % and the total of her money now is only $3,230 which is
almost has a $ 7,983 difference. Hence, choosing the Roth IRA would be a great option for her.

19. I think the strategy of Les can able to achieve the sustainable economic profits, using this
website consumer can compare and contracts between the prices and quality of the product but
they mostly the prefer the affordable one than the pricey one. Aside from it, they can also
increase their demand if ever the consumers prefer their products and by doing this it is
achieving the sustainable economics profits. As for me, I also would like to launch advertising
campaign, which would be focus on the firm’s value maximization and we all know that
advertising can help us with this because through it consumers can be persuade to try our
products.