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Start working on Chapter One Homework

Start working on Chapter One Homework. Numbers 10, 12 and 17. Managerial Economics & Business Strategy. Chapter 1 The Fundamentals of Managerial Economics. Present Value of a Series. What if you are “promised” different amounts every year??

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Start working on Chapter One Homework

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  1. Start working on Chapter One Homework Numbers 10, 12 and 17

  2. Managerial Economics & Business Strategy Chapter 1 The Fundamentals of Managerial Economics

  3. Present Value of a Series • What if you are “promised” different amounts every year?? • Present value of a stream of future amounts (FVt) received at the end of each period for “n” periods:

  4. Net Present Value • Suppose a manager can purchase a stream of future receipts (FVt) by spending “C0” dollars today. The NPV of such a decision is • PV – Costs of the project Decision Rule: If NPV < 0: Reject project NPV > 0: Accept project

  5. What is the maximum we would pay? (number 2) • What is the maximum amount you would pay for an asset that generates an income of $150,000 at the end of each of five years if the opportunity cost of using the funds is 9 percent?

  6. Can we do it?? • Buzz-Dot-Com is trying to decide whether or not to purchase a new flying device that will cost them $200,000 and will be “good” for five years. The device will reduce costs by $40,000 the first year, $50,000 the second year, $65,000 the third year, and $80,000 the fourth and fifth years. • What is the PV of cost savings if the interest rate is 8%. • Should Buzz-Dot-Com purchase the device?

  7. Can we??

  8. Present Value of a Perpetuity • An asset that perpetually generates a stream of cash flows (CF) at the end of each period is called a perpetuity. • If cash flow IS THE SAME EACH YEAR such as certain bonds or stocks….

  9. Can we do it? (number 5) • What is the value of a preferred stock that pays a perpetual dividend of $75 at the end of each year when the interest rate is 4%?

  10. How much is a firm worth?? • The value of a firm equals the present value of current and future profits • So maximization of profits really means… • Maximize firm value • Which means….Maximize present value of current and future profits

  11. Goal: Compare BENEFITS of the project to the COSTS Control Variables Output Price Product Quality Advertising R&D Basic Managerial Question: How much of the control variable should be used to maximize net benefits? Marginal (Incremental) Analysis

  12. Net Benefits • Net Benefits = Total Benefits - Total Costs • Profits = Revenue - Costs

  13. Marginal Benefit (MB) • Change in total benefits arising from a change in the control variable, Q: • Slope (first derivative) of the total benefit curve.

  14. Marginal Cost (MC) • Change in total costs arising from a change in the control variable, Q: • Slope (first derivative) of the total cost curve

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