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business
economics 14th global

Questions and Answers of Economics 14th Global

Suppose that a household derives income from a business whose only input is capital. The production function of the household is y = AKb where b < 1, A is a constant, and K is capital.a. Show that
Consider the following investment projects. A project could take place in Russia, where the probability of political turmoil in the district in question is one-half. If there is no political turmoil,
Suppose that you live in a low-income community, and that the government wants to help you by granting you the right to borrow \($120\) at a subsidized interest rate of 6 percent per annum. State
Abank is being subsidized by the government in the following way:Each time the bank extends a 1,000-peso loan, it gets a subsidy of 200 pesos. There are two potential borrowers to which the manager
In section 1.6 we described Compartamos, a Mexican microlender that charges interest rates at levels close to those of moneylenders. Why might Compartamos nevertheless create social benefits even at
If being a moneylender is as profitable as many observers claim, why don’t moneylenders face greater competition?
Give three potential explanations of why moneylenders charge high interest rates. How do the different explanations affect your assessment of the efficiency and equity of informal credit markets?
Households in poor communities commonly rely on loans from family and neighbors. Such loans often carry very low interest rates—even zero charges. Why might family and friends be willing to lend
Why is the fact that moneylenders’ marginal costs are below average costs a hallmark of monopolistic competition?
Free entry by businesses into a market is often taken to imply that there is a perfectly competitive market. Why might seeing free entry into local credit markets not be sufficient to determine that
Moral hazard is a problem when borrowers lack collateral. If they had collateral, it could be taken away, providing a punishment to shirkers.Can moral hazard be overcome if the lender is given the
Consider an economy with risk-neutral entrepreneurs, a competitive bank (or an NGO that simply tries to break even), and two types of potential borrowers. Starting a project costs \($100\), and it
Consider an economy that is similar to that in exercise 7, but it has three types of individuals. An individual of type 1 succeeds with 90 percent probability, in which case her gross return of y1 =
Consider an economy with risk-neutral individuals. There is a borrower that wants to run a project with required investment of \($100\). If the borrower puts enough effort into her project, she will
This exercise helps explain how the use of collateral facilitates investment. Consider the case of two borrowers. Borrower 1 has some collateral w = \($20\), unlike borrower 2 who has no collateral.
This exercise helps explain how wealthier borrowers have greater investment opportunities. Consider two borrowers who are equally productive. Borrower 1 is rich. She has cash equivalent to A =
Consider a project that needs a fixed investment I = \($100\) and that will be successful with gross return y (y > I) with certainty. A risk neutral borrower wants to invest in this project, but she
Consider a project that needs a fixed investment in the amount I, which yields a gross return y with probability p. Otherwise, it does not produce anything. A risk-neutral borrower, who has a private
If banks lack local knowledge and local enforcement possibilities, why can’t they overcome the problems by simply hiring locals as their agents?
A company owns a 6-year-old gear hobber that has a book value of \($60,000.\) The present market value of the hobber is \($80,000.Anew\) gear hobber can be purchased for \($450,000.\) Using an
Identify something you own, perhaps even something you still use regularly.a. Give a list of at least six reasons why you might consider replacing the identified item.b. Identify at least two
A company owns a 6-year-old gear hobber that has abook value of $60,000. The present market value ofthe hobber is $80,000. A new gear hobber can bepurchased for $450,000. Using an outsider’s point
Give two examples each of (1) functional obsolescence, (2) technological obsolescence, and (3) economic obsolescence for items that you or your family own.
In evaluating a piece of equipment for its optimal replacement interval, the following table of equivalent uniform annual costs is obtained. What is the optimal replacement interval for the
Ten reasons why companies use equipment long after replacements would be justified economically. In many cases, these reasons do not apply just to companies; rather, they apply to us as individuals.
A radiology clinic is considering buying a new$700,000 X-ray machine that will have no salvage value after installation, since the cost of removal will be approximately equal to its sales value.
The Container Corporation of America is considering replacing an automatic painting machine purchased 9 years ago for \($700,000.\) It has a market value today of \($40,000.\) The unit costs
Which of the following is not an approach to replacement analysis?a. Cash flow approachb. Insider viewpointc. Outsider viewpointd. Supply chain approach
A specialty concrete mixer used in construction was purchased for \($300,000\) 7 years ago. Its annual O&M costs are \($105,000.\) At the end of the 8-year planning horizon, the mixer will have a
The most common approach to determining the planning horizon for replacement analysis is which of the following?a. Shortest lifeb. Median Lifec. Longest lifed. Least common multiple
Online Educators (OE), a not-for-profit firm exempt from taxes, is considering replacing some electronic equipment associated with its distance learning (DL) facility. They spent \($100,000\) on the
A company owns a 5-year-old turret lathe that has a book value of $20,000.The present market value of the lathe is $16,000. A new turret lathe can be purchased for $45,000. Using a before-tax
A currently owned shredder used in a refuse-powered electrical generating plant has a present net realizable value of \($210,000\) and is expected to have a market value of \($10,000\) after 4 years.
A company owns a 5-year-old turret lathe that has a book value of $20,000. The present market value of the lathe is $16,000. A new turret lathe can be purchased for $45,000. Using a before-tax
Dell is considering replacing one of its material handling systems. It has an annual O&M cost of \($48,000,\) a remaining operational life of 8 years, and an estimated salvage value of \($6,000\) at
What two cost categories form the trade-off that leads to an optimal replacement interval?a. Direct costs and indirect costsb. Insider costs and outsider costsc. Operating and maintenance costs and
Allen Construction purchased a crane 6 years ago for \($130,000.\) They need a crane of this capacity for the next 5 years. Normal operation costs \($35,000\) per year. The current crane will have no
Increasing the magnitude of the initial investment tends to _________ the optimum replacement interval.a. decreaseb. increasec. reversed. not affect
A division of Raytheon owns a 5-year old turret lathe that has a non-tax book value of \($24,000.\) It has a current market value of \($18,000.\) The expected decline in market value is \($3,000\)
Five years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complex parts used in commercial and military aircraft worldwide. It cost \($350,000,\) had an
Five years ago, ARCHON, a regional architecture/contractor firm, purchased an HVAC unit for \($25,000\) that was expected to last 15 years. It will have a salvage value of \($0\) in 10 more years.
Clear Water Company has a down-hole well auger that was purchased 3 years ago for \($30,000.\) O&M costs are \($13,000\) per year. Alternative A is to keep the existing auger, which has a current
The Container Corporation of America is considering replacing an automatic painting machine purchased 9 years ago for \($700,000.\) It was depreciated as an asset for manufacturing fabricated metal
A specialty concrete mixer used in construction was purchased for \($300,000\) 7 years ago. It is MACRS-GDS 5-year property. Its annual O&M costs are \($105,000.\) At the end of an 8-year planning
A currently owned shredder originally costing \($800,000\) was purchased 6 years ago for use in a refuse-powered electrical generating plant. It was depreciated as MACRS-GDS 5-year property due to
Dell is considering replacing one of its material handling systems. The old system was purchased 7 years ago for \($130,000\) and was depreciated as MACRS-GDS 5-year property since the system is used
Allen Construction purchased a crane 6 years ago for \($130,000\) and depreciated it as MACRS-GDS 5-year property.They need a crane of this capacity for the next 5 years. Normal operation costs
A division of Raytheon owns a 5-year-old turret lathe used to manufacture fabricated metal products that was purchased for \($96,000\) and now has a financial reporting (non-tax) book value of
Five years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complex parts used in commercial and military aircraft worldwide. It cost \($350,000,\) had an
Five years ago, ARCHON, a regional architecture/contractor firm, purchased an HVAC unit for \($25,000.\) It is expected to last 10 more years with a net salvage value of \($0\) at the end of that
Clear Water Company has a down-hole well auger that was purchased 3 years ago for \($30,000.\) It has been depreciated over the 3 years as MACRS-GDS 5-year property. It has an estimated remaining
You plan to purchase a car for \($28,000.\) Its market value will decrease by 20 percent per year. You have determined that the IRS-allowed mileage reimbursement rate for business travel is about
Griffin Dewatering purchases a wellpoint pump connected to a skid-mounted diesel engine for \($14,000. Its\) market value for salvage purposes decrease by 30 percent each year. When installed on a
Polaris Industries wishes to purchase a multiple-use in-plant ‘‘road test’’ simulator that can be used for ATVs, motorcycles, and snowmobiles. It takes digital data from relatively short
A granary purchases a conveyor used in the manufacture of grain for transporting, filling, or emptying. It is purchased and installed for \($70,000\) with a market value for salvage purposes that
Milliken uses a digitally controlled dyer for placing intricate and integrated patterns on manufactured carpet squares for home and commercial use. It is purchased for \($400,000.\) Its market value
Griffin Dewatering purchases a wellpoint pump connected to a skid-mounted diesel engine for \($14,000.\) These are considered ‘‘construction assets’’ and are classified as MACRS-GDS 5-year
Polaris Industries wishes to purchase a multiple-use in-plant ‘‘road test’’ simulator that can be used for ATVs, motorcycles, and snowmobiles. This is for research and experimentation and is
A granary purchases a conveyor used in the manufacture of grain for transporting, filling, or emptying. The conveyor is considered MACRS-GDS 10-year property (remember the half-year convention). It
Milliken uses a digitally controlled dyer for placing intricate and integrated patterns on manufactured carpet squares for home and commercial use. The dyer is classified as MACRS-GDS 5-year property
A project under consideration has a 10-year projected life. The initial investment for the project is estimated to have a mean of \(\$ 10,000\) and a standard deviation of \(\$ 1,000\). The annual
True or False: In determining the optimum replacement interval, it is necessary to assume negligible salvage values.
Uncertainty can impact many elements of an engineering economic analysis. Given the list of factors below, rank them from most to least uncertain, and briefly justify why you ranked them in that
Match the terms in the first column with an appropriate definition from the second column. Terms (a) Breakeven analysis (b) Sensitivity analysis (c) Risk analysis Definitions (1) Determining how the
Cecil’s Manufacturing is considering producing a new product. The sales price would be \($10.25\) per unit. The cost of the equipment is \($100,000.\) Operating and maintenance (O&M) costs are
Reconsider Problem 3. Indicate whether each of the following statements is true or false by determining the new breakeven for each case. Each case is independent of the other cases.Data from problem
The Fence Company is setting up a new production line to create top rails. The relevant data for two alternatives are shown below.a. Based on MARR of 8 percent, determine the annual rate of
A manufacturer offers an inventor the choice of two contracts for the exclusive right to manufacture and market the inventor’s patented design. Plan 1 calls for an immediate single payment of
A pipeline contractor can purchase a needed truck for \($40,000.\) Its estimated life is 6 years, and it has no salvage value. Maintenance is estimated to be \($2,400\) per year. Operating expense is
A firm has the capacity to produce 650,000 units of product per year. At present, it is operating at 64 percent of capacity. The firm’s income per unit is \($1.00,\) annual fixed costs are
Spending \($1,500\) more today for a hybrid engine rather than a gasoline engine will result in annual fuel savings of \($300.\) How many years must this savings continue in order to justify the
A certain assembly requires rods varying in length from 0.25 to 4 inches long. The rods may be made from either brass or steel. The machining cost of brass rods is \($0.0054\) + \($0.006L\) per
A portable generator is needed at a remote construction site. Two alternatives are being considered. Their annual fixed costs and operating and maintenance costs per hour are shown in the table
The Cooper Company is considering investing in a recuperator. The recuperator will have an initial cost of \($20,000\) and a service life of 10 years. Operating and maintenance costs for the first
Snow Valley Ski Resort has been contracting snow removal from its parking lots at a cost of \($400/day.\) A snow removal machine can be purchased for \($25,000.\) The machine is estimated to have a
A small utility company is considering the purchase of a power-driven post-hole digger. The equipment costs \($8,000,\) has an estimated life of 8 years, and has a salvage value of \($1,000\) at that
To make a batch of 1,000 units, it is estimated that 120 direct labor hours are required at a cost of \($10\) per hour.Direct material costs are estimated at \($1,500\) per batch. The overhead costs
A manufacturer of precision castings has the capacity to produce 1,000,000 castings per year. Each sells for \($15.The\) variable cost per unit to produce the casting is \($9\) per casting. Annual
A new manufacturing plant costs \($5\) million to build. Operating and maintenance costs are estimated to be \($45,000\) per year, and a salvage value of 25 percent of the initial cost is expected.
Cowboy Metal Cutting produces a laser-cut part based on customer orders. The number of units requested on a customer’s order for the laser-cut part can vary from 1 to 150. Cowboy has determined
A subsidiary of a major furniture company manufactures wooden pallets. The plant has the capacity to produce 300,000 pallets per year. Presently the plant is operating at 70 percent of capacity. The
You have been asked to perform a sensitivity analysis on a company's plan to modernize its facilities to determine the impact of possible errors in estimating the net annual savings. The initial
A pork-processing facility is considering installing either a storage facility or a holding pond. A biosystems engineer has been hired to evaluate the economic trade-offs for the two alternatives.
A new project will cost \(\$ 80,000\) initially and will last for 7 years, at which time its salvage value will be \(\$ 2,500\).Annual revenues are anticipated to be \(\$ 15,000\) per year. For a
Plot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data in the table below. Vary only one parameter at a time, each within the range of -20
Plot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data in the table below. Vary only one parameter at a time, each within the range of -20
The cash flow estimates for a project are shown below. The initial cost is believed to be accurate, but the estimates of annual revenue and salvage value are subject to error. For a MARR of 3
A new project will cost \(\$ 80,000\) initially and will last for 7 years, at which time its salvage value will be \(\$ 2,500\). Annual revenues are anticipated to be \(\$ 15,000\) per year. The
Initial estimates of the parameters for an investment are given below.You wish to do a multiparameter sensitivity analysis based on the sensitivities shown. AW is the preferred measure of worth.a.
The owners of a discount motel chain are considering building a new motel. Optimistic, pessimistic, and most likely estimates of several key parameters have been obtained from the local builders and
Reconsider the data in Problem 28. Based on a present worth measure of worth, complete a multiparameter sensitivity analysis that examines all possible combinations of the estimates.Data from problem
A venture capitalist is considering investing \(\$ 400,000\) in a business start-up. It is expected that the start-up will generate annual receipts of \(\$ 80,000\) over a 10 -year period. However,
The parking superintendent is responsible for snow removal at his parking garage. The probabilities for the number of days per year requiring snow removal are shown in the chart below. These
Main Electric is deciding whether to invest \(\$ 19,700,000\) in a new plant. An analyst forecasts that the plant will generate the independent random cash flows shown in the table below at the end
An initial investment of \(\$ 22,500\) results in independent annual receipts of \(\$ 6,250\) until the end of the project life. The probability distribution for the project's life is shown in the
One of two mutually exclusive alternatives must be selected for implementation. Alternative \(\mathrm{A}\) is an equipment purchase; Alternative B is a lease arrangement with annual payments. The
A new CNC mill is expected to cost \(\$ 263,000\) and have a useful life of 6 years. The net annual savings generated by the mill are independent from year to year and are estimated to follow a
An investment of \(\$ 5,000\) is expected to generate the probabilistic returns shown in the table below over its 3 -year life. Assume the annual cash flows are independent and that the distribution
A proposed project has the following cash flow estimates:Assuming independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 15 percent, determine
A proposed project has the following cash flow estimates:Assuming independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 18 percent, determine

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