Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613

Student Name

Mohd Fakhrurrazi Ibrahim

Student ID

SP21684

Subject

Managerial Economics ( ECNM 613)

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613

Q2.

The maximum amount we need to pay for an asset that generates an income of
$150,000 for a period of five years if the opportunity cost of using fund is 9% is

PV

Q3.

150,000 + 150,000 + 150,000 + 150,000 + 150,000

(1+0.09)
(1+0.09)2 (1+0.09)3 (1+0.09)4 (1+0.09)5

$583,448.00

B(Q)

150 + 28Q 5Q2

C(Q)

100 + 8Q

MB(Q)

28 10Q

MC(Q)

N(Q)

B(Q) C(Q)

N(Q)

50 + 20Q -5(Q)2

65

When Q = 5
N(Q)
=

25

When Q = 1
N(Q)

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
Q4.

The value of the firm if the current profits are $550,000 with expected to grow
indefinitely at a constant annual rate of 5% and opportunity cost of fund is 8%.
a)

PVfirm = 0
= 550,000

= $19.8 million

b)

PV Ex dividend Firm

= 0
= 550,000
= $19.25 million

Q5.

The present value of the stock with perpetual dividend of $75 when the interest rate is
4% is
PVperpetuity

=
=
= $1,875

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
Q6.

The complete table as below

Total
Total
Net
Marginal
Control
Benefit
Cost
Benefit
Benefit
Marginal
Marginal Net
Variable Q B(Q)
C(Q)
N(Q)
MB(Q)
Cost MC(Q) Benefit MNB(Q)
100
1200
950
250
210
40
170
101
1400
1000
400
200
50
150
102
1590
1060
530
190
60
130
103
1770
1130
640
180
70
110
104
1940
1210
730
170
80
90
105
2100
1300
800
160
90
70
106
2250
1400
850
150
100
50
107
2390
1510
880
140
110
30
108
2520
1630
890
130
120
10
109
2640
1760
880
120
130
-10
110
2750
1900
850
110
140
-30

a) Net benefit is maximized when Q = 108

b) Marginal Benefit is higher than Marginal Cost

Q9.

B(Q) = 25(Q) Q2
C(Q) = 5 + Q2
MB(Q) = 25 2Q
MC(Q) = 2Q
a) Total Benefit when Q = 2
B(2) = 25(2) - 22
B(2) = 46
Total Benefit when Q = 10
B(10) = 25(10) - 102
B(10) = 150
b) Marginal Benefit when Q = 2
MB(2) = 25 2(2)
MB(2) = 21
Marginal Benefit when Q = 10
MB(10) = 25 2(10)
MB(10) = 5
4

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
c) Maximize benefit when MB(Q) = 25 2Q = 0
Thus Q = 12.5
d) Total cost when Q=2
C(2) = 5 + 22
C(2) = 9
Total cost when Q=10
C(10) = 5 + 102
C(10) = 105

e) Marginal Cost when Q = 2 is

MC(2) = 2(2)
MC(2) = 4
Marginal Cost when Q = 10 is
MC(10) = 2(10)
MC(10) = 20
f) Minimize total cost when MC(Q) = 2Q = 0 thus
Q=0
g) Maximizes net benefit is when MNB(Q) = MB(Q) MC(Q) = 0
25-2Q-2Q = 0
Q = 6.25

Q10. Building lease $100,000 per year for three years. The explicit cost is $35,000 and
implicit cost is $50,000. The interest rate is 4% per year.
a)

Present Value stream for Accounting Profits is

Accounting Profits = Total Revenue Explicit Cost
The Present Value stream for Accounting Profits is
PVaccounting Profits

=
=

= $180,380.92

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
b) Present Value stream for Economic Profits is
Economic Profits = Total Revenue Opportunity Cost
Economic Profits = Total Revenus - Explicit Cost Implicit Cost
PVEconomics Profits

=
=

+
+

= $41,626.37

Q12.
Energy efficient refrigerator = $500
Without energy efficient refrigerator = $400
Different is $100
Saving $25 end of the year for a period of 5 year
Opportunity fund cost is 5%.
NPV =

+
=

- Co
+

- $100

= $108.24- $100
= $8.24
Conclusion, buy the energy efficient refrigerator because saving $8.24 on the present
value.

Q14.
Tara is leaving her current job which pays $56,000 per year to start a new company.
Her overhead cost and operating expenses is $3,160,000. Tara expected a profit
margin of 20%
a) Accounting cost is $3,160,000. The implicit cost is 56,000. The opportunity cost is
accounting cost + implicit cost which is $3,160,000 + $56,000 = $3,216,000
b) To earn positive accounting profits she must earn more the $3,160,000. To earn
positive economic profits, she must earn more than $3,216,000

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
Q15
The firm has invested $170 million and it can either abandon the program or spent
another $30 million with opportunity cost of fund 7% for the next 5 year. Base on the
table given, the NPV is

NPV =

- Co

However year 1 to year 4 the expected profits is 0, therefore,

NPV =

- Co

NPV =

- 30,000,000.

NPV = 56,557,759.86 30,000,000

NPV = 26,557,759.86
This is positive and adding the firm value about $26.6 million.

Q16. Base on the table we need to calculate the PV for each advertising intensity.
PVHigh =

PVModerate =

PVLow =

= $290,871,525.17

= $201,953,418.48

= $245,078,888.05

Base on the result, the marketing manager should not agree with the team leader
recommendation for low advertising intensity, because the high advertising intensity
result high PV.

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
Q17. The firm current profits is $2.5 billion, average interest over the past 20 year is 8% per
year. Profit growth scenarios:

PVfirm = 0

a) Profit growth at an annual rate of 10 %

PVfirm = $2.5

= -$135 billion

Thus if the annual rate is higher than interest rate we are unable to
calculate the profit growth.

b) Profit growth at an annual rate of 3 %

PVfirm = $2.5

= $54 billion

c) Profit growth at an annual rate of 0 %

PVfirm = $2.5

= $33.75 billion

d) Profit decline at an annual rate of 3 %

PVfirm = $2.5

= $24.5 billion

Mohd Fakhrurrazi Ibrahim (SP21684)

Subject : ECNM613
Q19. Additional revenue after the campaign is $30,347,800 - $20,540,100 = $9,807,700
Explicit incremental cost is
($9,045,700-$6,100,000) + ($3,536,200 - $2,357,100) = $4,124,800
Implicit cost = $6,000,000 (lost in U.S advertising campaign)
Thus the economical cost is Explicit Cost + Implicit Cost = $10,124,800.
The cost is more than revenue, thus should not proceed with the new campaign.