8. Recommend a price and marketing strategy for the established automobile manufacturer seeking to enter the market for specialist competition motorcycles. Compare your recommendations to those for the automobile firm seeking to enter the volume small car market. 9. An engineering firm about to undertake a production run of 2000 items must decide whether to overhaul the production machinery. Because the machinery is quite old, the cost of an overhaul is uncertain. However, after the overhaul the failure rate for the machinery is certain to be 0.01. Without the overhaul, the machinery has a failure rate with the probability distribution given below. Each defective item costs the firm f6 in hand finishing. Failure rate Probability 0.01 0.5 0.02 0.2 0.03 0.1 0.04 0.1 0.05 0.1 Examination questions and answer notes 341 (a) Find the expected cost of overhaul that would make the risk- neutral decision-maker indifferent between overhauling or not. (b) The decision-maker decides to seek further information. Contact with the machinery supplier suggests an overhaul is equally likely to cost either f175 or 1225, depending on the problems encoun tered. Moreover a sample run of 10 items is produced, resulting in 2 defectives. Use this new information to re-assess the overhauling decision. (c) How would the decision be influenced by: (i) the firm's precarious financial position; (ii) the knowledge that the machinery is to be scrapped after the next production run. 10. 'Opportunity cost is both subjective and speculative. As such the concept of opportunity cost has no place in the scientific decision- making process.' Discuss. 11. (a) Briefly explain the significance of the firm's cost of capital. What are the factors determining that cost of capital, and how can that cost be estimated? (b) Given that debt finance is generally cheaper than equity finance, explain why the firm is unlikely to use solely debt finance to fund expansion. (c) A commodity broker is contemplating the acquisition of a new computer-driven management information system (MIS). The hardware for this would cost an initial f4 million, whilst software and staff training would cost f1 million for each of the first two years operation, and f200 000 per year thereafter. After six years, the system would be due for replacement. However scrapping the current (manual) system would save staff costs of f1.5 million each year. To finance the new investment the broker would use a combina- tion of debt and equity capital in the ratio 1:3. The broker can borrow at an interest rate of 10%, whilst interest paid can be set against the corporation tax liability (currently taxed at 30%). The broker is a listed company with a current share price of f3.00, and current dividend of 15 pence. Over the period the share price is expected to grow at an annual rate of 6%. Use the above information to evaluate investment in the new MIS, finding the net present value and internal rate of return on that investment. What other factors should the decision-maker take into account?adjacent to its new hall of residence. To secure local support for its planning application, the University has offered to open the court to local players at student rates for the first five years. After five years, the University can charge what it likes for the courts. Consequently, the University estimates that net revenue from the court will be f1000 for each of the first five years, rising by 10% (compounded) in each of the sixth to tenth years. In the eleventh and twelfth years rising maintenance costs will com- pletely offset rising fees so that net revenue stays at tenth year level. At the end of the twelfth year, the site is due for redevelopment. The cost of building the squash court is estimated to be $6000. To finance the court, the University must draw from its re- serves, currently earning 12% in Local Authority Bonds. Selling sufficient bonds would involve legal and administrative costs of f320. Advise the University on the viability of the project. What other factors should the University take into account? 10, A firm has an annual demand of S units for a good whose purchase cost is fc per unit. Each order costs fa to place, and the cost of holding stock is b% of the average value of stock per annum. Determine the optimal order quantity. A local firm uses 2000 units of a particular component each year. The component has a purchase price of f4/unit, while the cost of holding stock is estimated at 20% of the average stock value. If the cost of placing each order is f12.50, find the optimal number of orders placed each year. Suppose the component supplier offers a discount of 2% on the purchase price if orders are placed in units of 1000. Is the discount worth accepting? Suppose that instead of a single figure you had been given a probability distribution for the number of units used each year. Indicate the effect on stock policy. ECONOMICS 1986 Time allowed - 3 hours Answer FOUR questions 1. Critically assess the view that an understanding of the principles of 'scientific' decision-making is fundamental to the success of a modern economy. Examination questions and answer notes 335 2. (i) Explain the concept of opportunity loss, and show that the minimum opportunity loss is equal to the Expected Value of Perfect Information. (ii) The failure rate in a particular examination is estimated to be 40%. Construct a table showing the probabilities of 0, 1, 2 . . . 5 students failing in a sample of five. (iii) 150 graduate entrants are due to take their first professional accounting exam at the Institute of Certifiable Accountants. The probability distribution for the failure rate is estimated in the following table: Failure rate Probability 0.1 0.1 0.2 0.2 0.3 0.3 0.4 0.3 0.5 0.1 Each failing student is entitled to a $10 refund on professional fees. The Institute's senior tutor is confident that she could ensure a failure rate of 0.1 by holding an intensive revision course, at a cost to the Institute of $300. Advise the Institute on K whether the revision course should take place. A tutorial test of five students resulted in no failures. Use this information to revise the failure rate probability distribution,In research on the relationship between applicants' interview performance and their job performance 6 months later, job performance is ac Select one: a. criterion variable b. dependent variable c. predictor variable d. qualitative variable Dr. Howard found a correlation of .80 between job satisfaction and work performance. This means: Select one: a. high job satisfaction tends to be related to higher work performance. e b. high job satisfaction causes a person to perform better on the job. c. high job performance causes a person to like their job. d. high job satisfaction tends to be related to lower work performance. After participating in a research study a person would like more information about how his/her results will be used by the researcher. This concern is reflected in which research right? Select one: a. debriefing b. freedom from deception c. privacy d. confidentiality. The firm operates a technology that uses capital, labor and public goods (as roads and other infrastructure) to produce. Total output is given by: Y = =G K