A.

Using solver to maximize Furnco's profit (using solver)

Desk Chair

production quantity 7 16
profit per unit $40.00 $25.00
total profit $680.00 $280.00 $400.00

desk chair
raw materials used requirements by product available feasible
wood 76 4 3 77 1 680

B. How many desks to sell by selling 12 chairs to get total profit of $340 (using solver)
Desk Chair
production quantity 1 12
profit per unit $40.00 $25.00
total profit $340.00 $40.00 $300.00

desk chair
raw materials used requirements by product available feasible
wood 40 4 3 77 1 340

Section a Ok
Section b Ok

20 marks out of 20
 Wonderful Snacks, Inc.

New Product of Cookies and Bars Project Inputs

Cost of Equipment $1,100,000
Equipment's Shipment & Installment $50,000
Annual Depreciation (straight-line method) $150,000 Section a Marketing research
Project's Life (Years) 7 included in initial outlay (sunk
calculations incorrect (Tax cal
Equipment's Useful Life (Years) 7 depreciation expenses into ac
Terminal Value of Equipment $100,000 missing raw materials.
Marketing research $250,000 Section b Ok given your input
Additional Raw Materials $50,000 12.5 marks out of 20
1st year:
New Cookies and Bars Sales (Unit Packages)
500,000
Price per unit package $2
Unit package sales growth rate within the next
two years:
2nd year 7.50%
15%
3rd year 7.50%
Unit package sales growth rate within the
following two years:
4th year 5%
10%
5th year 5%
Unit package sales growth rate within the last
two years:
6th year 2.50%
5%
7th year 2.50%
price per unit package growth 3%
variable costs as % of sales 20%
Fixed Costs $850,000
firm's marginal tax-rate 35%

financing new equipment (semiannual coupon initial bond

12,000
bonds) investment

maturity (Years) 30
face value $1,000.00

coupon rate (annually) 5%

2.5%
yield to maturity (annual percentage rate) 12% 6%
cost of capital /WACC/required return 15% if this is referred to as discount rate, so it would be
Coupon Payment (annually):
 Since the company's financing of new equipment is
investment/cashflow
(a). calculate:
the initial investment
annual after-tax cash flows
terminal cash flow

(b). Determine
payback period
NPV
PI (Profitability Index)
IRR
MIRR

PROJECT ACCEPTANCE / REJECTION ???

Annual Cash Flows for New Product of Cookies a

Year 0 Year 1
Initial Outlay (1,450,000)
Sales 1,000,000
Variable Costs 200,000
Fixed Costs 850,000
Taxable Cash Flows (50,000)
Taxes (17,500)
Add: Depreciation 150,000
Annual After-Tax Cash Flow 117,500
Terminal Cash Flow
Total Annual Cash Flows (1,450,000) 117,500

Payback Period:
(1,450,000) investment
1,332,500 year 1
1,159,230 year 2
942,777 year 3
695,377 year 4
415,481 year 5
118,526 year 6
#N/A year 7

the fraction left for payback period #N/A

Payback Period: #N/A years

net present value (NPV): #N/A <=

profitability index (PI): #N/A <=

IRR: #N/A <

MIRR: 7% <

Decision to be made:
"Since the profitability measures are not satisfied and it indicates that the project is unprofitable, therefore the project shou
 Section a Marketing research should not have been
included in initial outlay (sunk costs) Anual Cash Flow
calculations incorrect (Tax calculations should have taken
depreciation expenses into account). Terminal cash flow
missing raw materials.
Section b Ok given your inputs

12.5 marks out of 20

537,500
577,813

606,703.13
637,038.28

652,964.24
669,288.34

$434.3500303 bond sold at a

$5,212,200.36 <---> bond's price: discount

number of
the value for each $25.00 coupon 60 twice a ayear
coupon payment: payments during 30 years
in 1 year
ferred to as discount rate, so it would be per six months according to the semi-annually coupon payment
ayment (annually): ($600,000) ($600,000) ($600,000) ($600,000)
 ompany's financing of new equipment is nothing to do with the current prospected project, therefore this calculation is not included in the
t/cashflow

ash Flows for New Product of Cookies and Bars Project

Year 2 Year 3 Year 4 Year 5 Year 6

1,107,250 1,190,294 1,249,808 1,312,299 1,345,106

221,450 238,059 249,962 262,460 269,021
850,000 850,000 850,000 850,000 850,000
35,800 102,235 149,847 199,839 226,085
12,530 35,782 52,446 69,944 79,130
150,000 150,000 150,000 150,000 150,000
173,270 216,453 247,400 279,895 296,955

173,270 216,453 247,400 279,895 296,955

maximum
<= allowable
period

0
 1
cost of capital
/WACC/required 15%
return

cost of capital
/WACC/required 15%
return

unprofitable, therefore the project should be Rejected"

 where: C = coupon payment value
n = number of payments
i = interest rate, or required yield
M = value at maturity/par value/face value

bond price is discounted/

less than face value/par
value, because the yield rate
is greater than the coupon
rate

every six months in 7 years in 30 years

$300,000.00 $2,100,000.00 $18,000,000.00

$600,000.00
pon payment
($600,000) ($600,000) ($600,000)
, therefore this calculation is not included in the project's

Year 7

1,378,734
275,747
850,000
252,987
88,546
150,000
314,442
#N/A
#N/A
Annual bonuses awarded to white- and blue-collar employees

Performance Probability White-collar bonus Blue-collar bonus

Outstanding 0.11 50.5 7.9
Strong 0.24 33.7 6.3
Good 0.26 26.8 5.5
Fair 0.25 13.3 3.4
Weak 0.09 4.1 1.2
Poor 0.05 0 0

A. a manager and an assembly line worker expect to receive in their bonus check
White-collar bonus Blue-collar bonus
Means 24.305 4.769

B. Group of employees that appear to be more variability in the annual bonuses distributions
Deviations from means Squared Deviations from means
White-collar bonus Blue-collar bonus White-collar bonus
Outstanding 26.195 3.131 686.178025
Strong 9.395 1.531 88.266025
Good 2.495 0.731 6.225025
Fair -11.005 -1.369 121.110025
Weak -20.205 -3.569 408.242025
Poor -24.305 -4.769 590.733025

White-collar bonus Blue-collar bonus

Variances 194.837875 4.531939
Stdevs 13.9584338305 2.1288351275

Answer: Since the variance and stdev values of White-collar bonus is greater than Blue-collar bonus, so white-collar
(management team) group employees has more variability in their bonuses

C. The strength of association on white-collar and blue-collar bonuses and possible implications between this two
relation based on the bonuses result

Covariance 29.000155
Correlation 0.975936586

Answer:
showing that the bonuses awarded for white-collar (management
The correlation of 0.975936586 team) and blue-collar (assembly line worker) are associated in a greatly
strong relationship

The implication from this result to the relation of both group of employees is
while the bonuses received by the management team and assembly workers has linear relation, which is when the
sales performance is in outstanding condition they get very high bonus, then when the sales performance is
decreasing it also lessen their bonuses.
in case of maintaining and even enhancing the annual bonuses they will get in the future, they must work harder to
enhance the company's sales performance:
management team may keep its best strategy or find another better one to promote sales,
while the assembly line workers will make extra work in producing products as fitting to market demand

Section a Ok
Section b Ok
Section c Figure ok but explanation not
clear

17.5 out of 20
 Assumption:
White-collar = members of the management team
Blue-collar = assembly line workers

distributions
ared Deviations from means
Blue-collar bonus
9.803161
2.343961
0.534361
1.874161
12.737761
22.743361

Blue-collar bonus, so white-collar

le implications between this two

for white-collar (management

e worker) are associated in a greatly

near relation, which is when the

en the sales performance is
future, they must work harder to

tting to market demand

Means and standard deviations of annual returns for stocks A to D

Stock Mean annual return Stdev of annual return

A 0.13 0.04
B 0.16 0.06
C 0.12 0.02
D 0.15 0.05

Stock A Stock B Stock C

Mean Annual Return 0.13 0.16 0.12
Stdev of Annual Return 0.04 0.06 0.02

Squared dev of annual return 0.0016 0.0036 0.0004

Correlations of annual returns for stocks A to D

Stock A Stock B Stock C

Stock A 1.00 0.45 0.75
Stock B 0.45 1.00 0.55
Stock C 0.75 0.55 1.00
Stock D -0.60 -0.35 -0.80

questions:
A. Annual returns are independent of each other, find the mean and std deviation!

stock A stock B stock C

invested amount/weights $10,000 $10,000 $10,000

variance $75,690,000 $70,560,000 $77,440,000

Mean $5,600
Variance $295,940,000
Stdev $17,203

B. dependent annual returns, find the correlations, mean and stdev?

compare the results wuth section a, and explain the differences

Covariances between stock returns (variances of stock returns are on the diagonal)
Stock A Stock B Stock C
Stock A 0.0016 0.00108 0.0006
Stock B 0.00108 0.0036 0.00066
Stock C 0.0006 0.00066 0.0004
Stock D -0.0012 -0.00105 -0.0008

Mean $5,600
Variance 668000
Stdev 817.3126696681

the result in B answer indicate that the investor has:

an expected return of $5,600 14%
then the standard deviation of 817.3126696681 shows a measure of the investment's risk
therefore, the difference between the result of this section and A section is considering about Stdev value --> which is
the investment's risk in section A is higher than the risk resulted in this section

C. Change to $15000 each in stocks B and D, then change to $5000 each in stocks A and C! Mean and Stdev? intuitive explana
(See worksheet "number 4.C" for the answer)

Section a Std Dev not correct

Section b Ok
Section c Ok

17.5 marks out of 20

Stock D
0.15
0.05

0.0025

Stock D
-0.60
-0.35
-0.80
1.00

stock D total
$10,000 $40,000

$72,250,000 Stock A $1,300

Stock B $1,600
Stock C $1,200
Stock D $1,500
Mean of the sum $5,600

Stock D
-0.0012
-0.00105
-0.0008
0.0025
Stdev value --> which is

ean and Stdev? intuitive explanation for the changes happened here?
C. Change to $15000 each in stocks B and D, then change to $5000 each in stocks A and C! new Mean and Stdev?

Means and standard deviations of annual returns for stocks A to D

Stock Mean annual return Stdev of annual return

A 0.13 0.04
B 0.16 0.06
C 0.12 0.02
D 0.15 0.05

Stock A Stock B Stock C Stock D

Mean Annual Return 0.13 0.16 0.12 0.15
Stdev of Annual Return 0.04 0.06 0.02 0.05

Squared stdev of annual 0.0016 0.0036 0.0004 0.0025

return

Correlations of annual returns for stocks A to D

Stock A Stock B Stock C Stock D

Stock A 1.00 0.45 0.75 -0.60
Stock B 0.45 1.00 0.55 -0.35
Stock C 0.75 0.55 1.00 -0.80
Stock D -0.60 -0.35 -0.80 1.00

stock A stock B stock C stock D

invested amount/weights $5,000 $15,000 $5,000 $15,000

Covariances between stock returns (variances of stock returns are on the diagonal)
Stock A Stock B Stock C Stock D
Stock A 0.0016 0.00108 0.0006 -0.0012
Stock B 0.00108 0.0036 0.00066 -0.00105
Stock C 0.0006 0.00066 0.0004 -0.0008
Stock D -0.0012 -0.00105 -0.0008 0.0025

Mean $5,900
Variance 941000 the change on the values
Stdev 970.0515450222

intuitive explanation
the result indicates that the investor has:
increased his/her "expected $0 or in 0% become
return" from

and followed by the increment

of his/her "investment risk" 0 to become 970.051545
from
so, it is clear that the more investor expects to get investment return, it will also offer a higher risk for the investor
d C! new Mean and Stdev? intuitive explanation for the changes happened here?

total
$40,000

$5,900 or in 14.75%
k for the investor
 NATURAL GAS EXPLORATION AND DEVELOPMENT

a local energy provider offers a landowner $180,000

additional received by landowner

$1,800,000

landowner interested to explore and develop the field

herself
inititate contract $300,000
net profit if natural gas is discovered $6,000,000

probability estimation of finding gas 60%

inputs
Cost to initiate a contract (by her own) $300,000

Probability of finding natural gas 0.60

Probability of no natural gas found 0.40

A. PAYOFF TABLE FOR LANDOWNERS (IN DOLLARS)

PAYOFF TABLE FOR LANDOWNERS (IN DOLLARS)

Landowner Decision Don't do anything

the offer acceptance
doing by her own
Probability

B. RISK PROFILE FOR EACH POSSIBLE DECISSIONS

the offer acceptance to explore and develop natural gas

Landowner's acceptance
to the Local Energy Provider's offer
0.70
0.60
0.50
0.40 Row 27

0.30
0.20
0.10
0.00
$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000
 0.40 Row 27

0.30
0.20
0.10
0.00
$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000

doing by her own to explore and develop natural gas

Doing by a Landowner herself

0.70

0.60

0.50

0.40 Row 27
0.30

0.20

0.10

0.00
($2,000,000) $0 $2,000,000 $4,000,000 $6,000,000 $8,000,000

C. DECISION TREE AND EXPECTED MONETARY VALUE (EMV) CALCULATION

Alternative EMV Calculation

Don't do anything 0(1)
the offer acceptance 1980000(0.6)+(180000)(0.4)
doing by her own 5700000(0.6)+(-300000)(0.4)
maximum EMV

#MACRO?
No
0
explore and develop the land?
Landowner decision in gas exploration and development
#MACRO?

#MACRO?
Yes
0
interpreting the decision tree:
the best decision strategy in this case which is indicated by TRUE that lead to the optimal decision, is the landowner should ma
exploration and development by dealing a contract with the local experts. And if the natural gas is available, she will get optim

Section a Ok
Section b Ok (Precision tree could have generated it
for you)
Section c Ok

20 marks out of 20
 for exploration rights to natural gas and option for future development

if discover a natural gas during the exploration

sunk cost

note: the cost will be lost if no gas found

Outcome

the availability of natural gas in the field

available not available
0 0
$1,980,000 $180,000
$5,700,000 -$300,000
0.60 0.40

Row 27

$2,500,000
 Row 27

$2,500,000

Row 27

$8,000,000

EMV
$0
$1,260,000
$3,300,000
$3,300,000

#MACRO?
#MACRO?

60.0% #MACRO?
Available
$1,800,000 #MACRO?
#MACRO? natural gas found?
Local energy provider
$180,000 #MACRO?
40.0% #MACRO?
Not available
0 #MACRO?
by who?
#MACRO?
60.0% #MACRO?
Available
$6,000,000 #MACRO?
#MACRO? naural gas found?
Landowner with local experts
-300000 #MACRO?
 40.0% #MACRO?
Not Available
0 #MACRO?

al decision, is the landowner should make use her land to natural gas
tural gas is available, she will get optimal profit