Week 1 Assignment

Chapter 1, Q14

Accounting Cost = Overhead cost & Operating expenses = 3,160,000

Implicit Cost = 56,000

Opportunity Cost = Implicit cost + Explicit Cost = 3,160,000 + 56,000 = 3,216,000

To earn positive Accounting profit, Revenue should be more than 3,160,000 (Accounting cost)

The Accounting cost includes only the Explicit costs or the overhead and operating cost incurred.

To earn positive Economic profit, Revenue should be more than 3,216,000 (Economic cost)

The Economic cost includes both the Explicit & Implicit costs incurred.

Chapter 1, Q15

Here, the net present value of DAS’s R&D initiative is

NPV of expected profits = 15000000/(1+0.07)5 + 16500000/(1+0.07)6 + 18150000/(1+0.07)7

+19965000/(1+0.07)8 + 21961500//(1+0.07)9

= $ 56557759

Present value of costs = $ 30000000

NPV of the project = 56557759 – 3000000 = $ 26557759

Since this is positive, DAS should spend the $30 million. Doing so adds about $26.6 million to

the firm’s value.

Chapter 1, Q16

The present value of profits from each advertising strategy are as follows:

Present value of high advertising strategy

= 15000000/(1+0.10) + 90000000/(1+0.10)2 + 27000000/(1+0.10)3

= $ 290871525

Present value of Moderate advertising strategy

= 30000000/(1+0.10) + 75000000/(1+0.10)2 + 150000000/(1+0.10)3

= $ 201953418

Present value of Low advertising strategy

= 70000000/(1+0.10) + 105000000/(1+0.10)2 + 126000000/(1+0.10)3

= $ 245078888

Since the high advertising results in profit stream with the greatest present value, it is the

best option.

Chapter 1, Q19

Direct and indirect costs are the same regardless of whether you adopt the project and therefore
are irrelevant to the decision.

The incremental revenue if proceeded with new advertising campaign is = 30,347,800 -

20,540,100 = $ 9807700

To earn these additional revenues, however, company is spending an additional $2,945,700 in

TV airtime and $1,179,100 for additional ad development labor. Total $ 4124800

The incremental costs if proceeded with new advertising campaign is = explicit incremental cost
+ implicit incremental costs = 6,000,000 + 4,124,800 = $ 10,124,800

Going forward with the plan would reduce the firm’s bottom line by

10124800 -9 807700 = $ 317,100

So the company should not launch the advertising campaign.