Answer:
True
Explanation:
Before a consumer makes a decision to buy a product, several factors can affect him. Two distinct factors are the attitude of others and unexpected situational factors. When the customer notices that a lot of people around him have a negative disposition or opinion about a product, they are likely to be discouraged from buying that product.
This is even more likely to happen if the consumer lacks enough motivation to buy that product. So the attitude of others can affect the buyer's intention which is his motivation and the final decision to purchase that product.
A lot of factors can come between purchase intensions. A factor that can come between the purchase intention and purchase decision is the attitude of others is a true statement.
The more positive a person's attitude toward the a product, the greater their purchase intentions.
Another factor consider is perceived playfulness that also affects purchase intention positively.
The factors that affect a consumer's purchase intention can be said to be product perception, shopping experience, customer service etc.
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Farris Corporation, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 78 Units in beginning inventory 0 Units produced 8,800 Units sold 8,700 Units in ending inventory 100 Variable costs per unit: Direct materials $ 18 Direct labor $ 10 Variable manufacturing overhead $ 4 Variable selling and administrative expense $ 5 Fixed costs: Fixed manufacturing overhead $255,200 Fixed selling and administrative expense $ 87,000 What is the unit product cost for the month under absorption costing
Answer:
$61
Explanation:
The computation of unit product cost for the month under absorption costing is shown below:-
Unit product cost = Direct material + Direct labor + Variable Manufacturing overhead + Fixed manufacturing cost
= $18 + $10 + $4 + ($255,200 ÷ 8,800)
= $61
Therefore for computing the unit product cost for the month under absorption costing we simply applied the above formula.
Cutting flights and declaring bankruptcy are long-run decisions. What impact would you predict these actions would have on the airlines remaining in business?
Answer:
Follows are the solution to this question:
Explanation:
The declaration of bankruptcy as well as flight cutting reduces the amount for flights and also the flight sin operation leading to both a supply reduction. While the business continued, its other airlines will have an increased engagement and thus higher prices and will be seeing recovery for both the airline industry over an amount of time.
During 20x1, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:________.
FIFO Weighted-average
January 1, 20x1 $71,000 $77,000
December 31, 20x1 $79,000 $83,000
Orca's income tax rate is 30%.
In its 2005 financial statements, what amount should Orca report as the cumulative effect of this accounting change?
a) $2,800
b) $4,000
c) $4,200
d) $6,000
Answer:
Orca Corp.
The cumulative effect of this accounting change in estimate is:
That the cost of goods sold will be reduced by:
b) $4,000
Explanation:
a) Data and Calculations:
FIFO Weighted-average Difference
January 1, 20x1 $71,000 $77,000 $6,000
December 31, 20x1 $79,000 $83,000 $4,000
Orca's income tax rate is 30%.
Note that the difference in the cost of the beginning inventory does not have any effect in the current period's financials. It was an estimate that was done previously and Orca does not need to restate its financials for the previous year because of the change. The accounting change only affects the current period.
Yoshi Co.'s 12/31/2020 inventory on a FIFO basis was $980,000. The following information is available: Estimated selling price is $1,020,000; Estimated cost of disposal is $40,000; Normal profit margin is $120,000; and Current replacement cost is $900,000. At 12/31/2020, assuming Yoshi uses the loss method, what amount of loss should Yoshi record from applying LCM
Answer:
Yoshi Co.
The amount of loss that Yoshi Co. should record from applying LCM (the lower of Cost or Market price) is:
$40,000
Explanation:
a) Data and Calculations:
FIFO inventory on 12/31/2020 = $980,000
Current replacement cost = $900,000
Net realizable value = $980,000 ($1,020,000 - $40,000)
Normal profit margin = $120,000
Loss to be recognized based on current replacement cost = FIFO purchase cost minus Current replacement cost
= $80,000 ($980,000 - $900,000)
b) Under the US GAAP (generally accepted accounting principles) of prudence and conservatism, the loss of $80,000 must be recognized in the current period, since the inventory will be booked at $900,000, its current replacement cost, which is lower than the FIFO purchase cost of $980,000.
CDB stock is currently priced at $85. The company will pay a dividend of $5.69 next year and investors require a return of 11.6 percent on similar stocks. What is the dividend growth rate on this stock?
Answer:
4.91%
Explanation:
CDB stock is currently priced at $85
The company will pay a dividend of $5.69
The required return is 11.6%
There for the dividend growth rate on this stock can be calculated as follows
11.6/100= (5.69/85) + growth rate
0.116= 0.0669 + growth rate
0.116 - 0.0669 = growth rate
0.0491 × 100 = growth rate
Growth rate = 4.91%
On April 1, 2020, the City of Southern Ponds issued $5,000,000 in 4% general obligation, tax supported bonds at 101 for the purpose of constructing a new police station. The premium was transferred to a debt service fund. A total of $4,990,000 was used to construct the police station, which was completed before December 31, 2020, the end of the fiscal year. The remaining funds were transferred to the debt service fund. The bonds were dated April 1, 2020, and paid interest on October 1 and April 1. The first of 20 equal annual principal payments of $250,000 is due April 1, 2021. In addition to reporting Bonds Payable and (unamortized) Bond Premium in the government-wide Statement of Net Position, how would the bond sale be reported
Answer:
$100,000
$350,000
Explanation:
The bond sale be reported as debt service expenditures for 2020 and 2021 can be calculated as follows
The Amount would be reported as debt service expenditures for 2020
= $5,000,000 x 4% x 1/2 year
= $100,000
The amount would be reported as debt service expenditures for 2021
= $5,000,000 x 4% + $250,000
= $350,000
4. Give two reasons why GDP is often not seen as the best measure of living standards.
Answer:
Different factors account to it.
Explanation:
Because many factors that contribute to people's happiness are not bought and sold, GDP is a limited tool for measuring standard of living. To understand it's limitations better, let's take a look at several factors that are not accounted for in GDP.
GDP does not account for leisure time. The US GDP per capita is larger than the GDP per capita of Germany, but does this prove that the standard of living in the United States is higher? Not necessarily since it is also true that the average US worker works several hundred hours more per year more than the average German worker. The calculation of GDP does not take German workers extra weeks of vacation into account.
GDP includes what is spent on environmental protection, healthcare, and education, but it does not include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier. GDP includes spending on medical care, but it does not address whether life expectancy or infant mortality have risen or fallen. Similarly, GDP counts spending on education, but it does not address directly how much of the population can read, write, or do basic mathematics.
Creswell Corporation's fixed monthly expenses are $30,000 and its contribution margin ratio is 63%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $92,000?
a. $27,960.b. $62,000.c. $57,960.d. $4,040.
Answer:
Net income= $27,960
Explanation:
Giving the following information:
Fixed costs= $30,000
contribution margin ratio= 0.63
Sales= $92,000
First, we need to calculate the total contribution margin:
Total contribution margin= 92,000*0.63= 57,960
Now, the net income:
Net income= 57,960 - 30,000
Net income= $27,960
is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Present value Investment X $ Investment Y $ (b) Which of these cash flow streams has the higher present value at 5 percent? (Click to select) Requirement 2: (a) If the discount rate is 23 percent, what is the present value of these cash flows? (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Present value Investment X $ Investment Y $ (b) Which of these cash flow streams has the higher present value at 23 percent?
Answer and Explanation:
1A. For investment X, given 6% discount rate, 6700 PMT, N= 9 years
Present value of investment X= 6700* PVIF using 6%, 9 years
= $45751.34
For investment Y, given 6% discount rate, 9200 PMT, N= 5 years
Present value of investment Y =9200*PVIF using 6%, 9 years
=$38753.75
1B. Investment X from the above has higher present value
2A. For investment X, given 22% discount rate, 6700 PMT, N = 9 years
Present value of investment X
=6700*PVIF using 22% ,9 years
= $25368.11
For investment Y, given 22% discount rate, 9200 PMT, N = 5 years
Present value of investment X
=9200*PVIF using 22% ,N = 5 years
= $26345.49
2B. Investment Y from the above has higher present value.
Waterway Company sold 10,100 Super-Spreaders on December 31, 2020, at a total price of $1,050,400, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is $535,300. The assurance warranties extend for a 2-year period and are estimated to cost $37,000. Waterway also sold extended warranties (service-type warranties) related to 1,800 spreaders for 2 years beyond the 2-year period for $10,800. Given this information, determine the amounts to report for the following at December 31, 2020: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash. Amounts Reported in Income Sales revenue $ Warranty Expense Amounts Reported on the Balance Sheet Unearned Service Revenue $ Cash Warranty Liability
Answer:
Amounts Reported in Income
Particulars Amount
- Sales revenue $1,050,400
- Warranty expenses $37,000
Amounts Reported on the Balance Sheet
Particulars Amount
- Unearned service revenue $10,800
- Cash ($1,050,400 + $10,800) $1,061,200
- Warranty Liability $37,000
[Same investments as the prior question] Suppose two local start-ups are raising funding by issuing shares of equity at $10,000 per share. One start-up is a whiskey distillery; the other is a beer brewery. You estimate the expected returns on your investment to be 50% over five years in both cases. You also believe that the likelihood of being paid out $20,000 per share is greater with the distillery than with the brewery. Suppose now that you hold a portfolio of many other risky assets, and that this would be your N 1 investment. Which investment do you prefer to make, the distillery or the brewery
Answer:
you should purchase the brewery's stock
Explanation:
First of all, as investors we should always try to maximize our returns while avoiding risks. It is really hard to balance both, but we must compare stocks to see which may represent a higher gain while posing the lesser or same risk.
Initial investment in each = $10,000 (equal for both)expected returns over 5 years = $5,000 (equal for both)but there is a higher possibility of the distillery's stock being more valuable, and that makes a difference.Both stocks seem equally risky, but they are not. When you calculate expected returns, you multiply the possible returns by their probability. I'm not sure how they calculated the expected returns of the above stocks, but the following can help you understand my point:
stock B return probability expected return
great 100% 25% 25%
normal 50% 50% 25%
bad 0% 25% 0%
total 100% 50%
stock D return probability expected return
great 100% 30% 30%
normal 50% 40% 20%
bad 0% 30% 0%
total 100% 50%
Both stocks have the same expected return, but stock B is less risky because the chance of being a bad investment is lower.
The expected return on the market portfolio is 12%, and the relevant risk-free rate is 4.2%. What is the equity premium?
Answer:
7.8%
Explanation:
The expected return on the market portfolio is 12 percent
The risk free rate is 4.2 percent
Therefore the equity premium can be calculated as follow
= expected return - risk free rate
= 12% - 4.2%
= 7.8%
Hence the equity premium is 7.8%
B. Panuto: Isulat sa patlang kung ano ang tinutukoy sa pangungusap.
1. Ang tawag sa taong nagnenegosyo.
2. Ang panimulang salapi na ginagamit sa
pagnenegosyo.
3. Ang isang entrepreneur ay dapat magkaroon nito
upang ang produkto o serbisyo ay kumita ng
maganda
4. Alamin ang pagtatayuan ng negosyo.
5. Mahalaga ito upang maihatid at makilala ang
bagong produkto sa pamilihan.
Explanation:
1.negosyante.
2.kapital.
3.ng sapat na kaalaman sa pang negosyo.
4.inquiry
5.flayears
Crimson Inc. recorded credit sales of $797,000, of which $540,000 is not yet due, $170,000 is past due for up to 180 days, and $87,000 is past due for more than 180 days. Under the aging of receivables method, Crimson Inc. expects it will not collect 2% of the amount not yet due, 16% of the amount past due for up to 180 days, and 27% of the amount past due for more than 180 days. The allowance account had a debit balance of $3,800 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account
Answer:
$65,290
Explanation:
The computation of the ending balance of the allowance account is shown below:-
Bad Debts for accounts receivable not yet due is
= $540,000 × 0.02
= $10,800
Bad Debts for accounts receivable due for up-to 180 days:
= $170,000 × 0.16
= $27,200
Bad Debts for accounts receivable due for more than 180 days:
= $87,000 × 0.27
= $23,490
Ending balance of Allowance account:
= $3,800 + $10,800 + $27,200 + $23,490
= $65,290
Mr. C made the following gifts: $12,000 to a university to pay tuition costs for his niece. An undeveloped tract of land to his sister that had an adjusted basis to Mr. C of $4,000 and a fair market value of $25,000. Various shares of stock to his wife that had an adjusted basis to Mr. C of $15,000 and a fair market value of $40,000. Mr. C did not consent to gift-splitting. What is the total amount of taxable gifts
Answer:
$10,000
Explanation:
Gifts are only taxed when their fair market value is higher than $15,000. Any gifts made to your spouse are not taxable. Gift taxes are calculated on a per person base, as long as they do not exceed the lifetime exemption (which is $11.58 million).
The tuition costs of her niece are not taxable since they are less than $12,000. The stocks given to his wife are not taxable either. The only taxable gift is the land given to his sister which had a FMV of $25,000. The taxable amount = $25,000 - $15,000 = $10,000
Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Clicks' income for the year consists of $89,000 in salary, $1,500 interest income, and $700 long-term capital loss. The Clicks' expenses for the year consist of $1,450 investment interest expense. Assuming that the Clicks' marginal tax rate is 35 percent, what is the amount of their investment interest expense deduction for the year
Answer:
$1,450
Explanation:
Interest Income = $1,500
Investment Interest expenses = $1,450
Allowed deduction limit investment interest is subject to investment income. So $1,450 is allowed as deduction
If there was a 24% chance of having a contract signed to purchase a home in any one month and there were 55 homes on the market, what would be the probability that exactly 15 of them would have a contract signed during this month?
a. 10.3%
b. 24.0%
c. 66.7%
d. 23.0%
Answer:
a. 10.3%
Explanation:
P∝F of Binomial distribution is given as Pr.(x=x) = nCxP^x(1-p)^(n-x)
P = 0.24, n= 55, x =15 Note: C = Combination
Pr.(x = 15) = 55"C"15(0.24)^15(0.76)(55-15)
Pr.(x = 15) = 55"C"15(0.24)^15(0.76)^40
Pr.(x = 15) = 0.1026
Pr.(x = 15) = 10.26%
Pr.(x = 15) = 10.3%
4. Sectoral shifts, frictional unemployment, and job searches Suppose the world price of steel falls substantially. The demand for labor among steel-producing firms in Pennsylvania will . The demand for labor among automobile-producing firms in Michigan, for which steel is an input, will . The temporary unemployment resulting from such sectoral shifts in the economy is best described as unemployment. Suppose the government wants to reduce this type of unemployment. Which of the following policies would help achieve this goal? Check all that apply. Improving a widely used job-search website so that it matches workers to job vacancies more effectively Establishing government-run employment agencies to connect unemployed workers to job vacancies Increasing the benefits offered to unemployed workers through the government's unemployment insurance program
Answer:
decrease
increase
structural unemployment
Improving a widely used job-search website so that it matches workers to job vacancies more effectively
Establishing government-run employment agencies to connect unemployed workers to job vacancies
Explanation:
If the world price of steel falls, the profits that can be earned from producing steel would fall. This would make steel-producing firms cutback on production. If they do this, they would lead less labour, so the demand for labour would fall.
The decrease in the price of steel would make purchasing steel by automobile companies cheaper. This would lead to a rise in production and as a result an increase in the demand for labour.
Structural unemployment occurs when there is a mismatch between the skills of labour and the jobs available. Measures taken to increase information on available jobs would reduce this type of unemployment
If a company purchases equipment costing $4,500 on credit, the effect on the accounting equation would be: Multiple Choice Assets increase $4,500 and liabilities decrease $4,500. One asset increases $4,500 and another asset decreases $4,500. Equity decreases $4,500 and liabilities increase $4,500. Equity increases $4,500 and liabilities decrease $4,500. Assets increase $4,500 and liabilities increase $4,500.
Answer: Assets increase $4,500 and liabilities increase $4,500.
Explanation:
An asset are the properties which a business or an organization owns. An asset possess an economic value.
Since the equipment purchased is an asset, this will lead to an increase of assets by $4500 and since it was bought on credit and hasn't been paid for, liabilities will also increase by $4500.
We sell to a customer paying with Visa and the fee is 2%. Part of the transaction would include a debit to:
Answer:
there are no available options, but the complete journal entry to record a credit card sale is:
Dr Cash account 98% of sale
Dr Credit card fees 2% of sale
Cr Sales revenue 100% of sale
Explanation:
Since VISA payments are automatic, you can debit cash directly. There is no need to debit accounts receivable and then once the payment is confirmed, debit cash. Some credit cards do not pay automatically, and in those cases you should debit accounts receivable.
Instead of credit card fees, some people use credit card discount, or credit card expense, but all these accounts are basically the same. They are all expense accounts.
Q 20.27: Liberty Bicycles currently sells unassembled bikes for $240 each. The variable production costs for each bike are $35 and the fixed production costs are $72. Liberty is thinking about selling the bikes fully assembled for $300 each. The variable costs for assembling one bike will be $18 and the fixed costs will be $31. Given these figures, Liberty will increase its net income per unit by ________ if it opts to assemble the bikes.
Answer:
$11
Explanation:
Find the incremental effect on net income of assembling the bikes as follows :
Incremental analysis for assembling the bikes per unit
Sales ( $300 - $240) $60
Less incremental costs :
Variable costs ($18)
Fixed production costs ($31)
Incremental Income/(loss) $11
Conclusion
Thus Liberty will increase its net income per unit by $11 if it opts to assemble the bikes.
Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,600 and will produce cash flows as follows: End of Year Investment A B 1 $ 8,600 $ 0 2 8,600 0 3 8,600 25,800 The present value factors of $1 each year at 15% are: 1 0.8696 2 0.7561 3 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment B is:
Answer:
Net present value $1,363.50
Explanation:
The computation of the net present value of B is shown below:
Year Cash flows PVIFA factor at 15% Present value
0 -$15,600 1 -$15,600
1 0 0.8696 0
2 0 0.7561 0
3 25,800 0.6575 $16,963.50
Net present value $1,363.50
ear Net Income Profitable Capital Expenditure 1 $ 14 million $ 8 million 2 18 million 11 million 3 9 million 6 million 4 20 million 8 million 5 23 million 9 million The Hastings Corporation has 2 million shares outstanding. (The following questions are separate from each other). a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years? (Enter your answer in millions.)
Answer:
$42 Million
Explanation:
The computation of the total cash dividend is shown below:-
Year Net Income Profitable capital Expenditure Dividends
1 $14 Million $8 Million $6 Million
2 $18 Million $11 Million $7 Million
3 $9 Million $6 Million $3 Million
4 $20 Million $8 Million $12 Million
5 $23 Million $9 Million $14 Million
Total cash dividends $42 Million
Delphi Company uses job-order costing. It applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, Delphi estimated that it would work 37,000 machine-hours and incur $222,000 in manufacturing overhead cost. The following transactions were recorded for the year: a. Raw materials were issued for use in production, $367,000 ($345,000 direct and $22,000 indirect). b. Employee costs were incurred: direct labor, $309,000; indirect labor, $44,000; and administrative salaries, $155,000. c. Factory depreciation, $175,000. d. Selling costs, $140,000. e. Manufacture overhead was applied to jobs. The actual machine hours for the year were 35,000 hours. a. Compute the total manufacturing overhead cost applied to jobs during the year.
Answer:
Allocated MOH= $210,000
Explanation:
First, we need to calculate the predetermined overhead rate:
Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base
Predetermined manufacturing overhead rate= 222,000/37,000
Predetermined manufacturing overhead rate= $6 per machine hour
Now, we cal allocate overhead:
Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base
Allocated MOH= 6*35,000
Allocated MOH= $210,000
A bank offers 8.00% on savings accounts. What is the effective annual rate if interest is compounded semi-annually?Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))
Answer:
Effective Annual Rate = 8.1600%
Explanation:
The effective annual rate the interest rate that is adjusted for compounding over a given period of time. It is given by the formula:
[tex]r = (1+\frac{i}{n})^n -1\\where:\\r = effective\ annual\ rate\\i = nominal\ interest\ rate\ = 8.00\% = 0.08 \\n = number\ of\ compounding\ periods\ per\ year\ = 2\ (semi-annually)[/tex]
[tex]r = (1+\frac{0.08}{2})^2 -1\\r = (1\ +\ 0.04)^2 - 1\\r = (1.04)^2 - 1\\r = 1.0816 - 1\\r = 0.0816\\r = 8.1600 \%[/tex]
Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating profits were $180,000. What is Lake's break-even sales volume
Answer:
$1,600,000
Explanation:
Sales
$2,200,000
Contribution margin ratio
30%
$660,000
Sales $2,200,000
Contribution margin $660,000
Operating profit $180,000
Fixed cost = Contribution margin - Operating profit
= $660,000 - $180,000
= $480,000
Break even sales = Fixed cost / Contribution margin ratio
= $480,000 / 30%
= $1,600,000
Therefore, Lake's break even sales volume is $1,600,000
Your grandpa doesn't trust "young 'uns" so you are set to inherit a $1,000,000 trust fund on your 50th birthday. Your Grandpa also doesn't like banks so he has buried the cash somewhere on his 40-acre farm in a location that will be revealed to you by his lawyer since Grandpa will not be around when you turn 50. If you could possibly get your hands on it now (when you are 20), you could put it in a bank at 6% annual interest. If you were able to dig up the money now, how much would you have when you turn 50?
Answer:
FV= $5,743,491.17
Explanation:
Giving the following information:
Present value (PV)= $1,000,000
Number of periods (n)= 30 years
Annual interest= 6% = 0.06
To calculate the future value (FV), we need to use the following formula:
FV= PV*(1+i)^n
FV= 1,000,000*(1.06^30)
FV= $5,743,491.17
Speicher sells sports shoes and formal shoes. Sports shoes sell for $110 each and cost $50 in variable expenses to make. Formal shoes sell for $220 and cost $100 in variable expenses to make. Speicher’s fixed expenses are $50,000. If 35% of his revenues are from sports shoes, what is Speicher’s weighted average contribution margin ratio? Provide your answer in decimal form (i.e. 65.2% = 0.652) and to three decimal places. Do not round intermediary calculations.
Answer:
weighted contribution margin ratio = 0.545
Explanation:
contribution margin of sport shoes = $110 - $50 = $60
contribution margin ratio of sport shoes = $60 / $110 = 0.545454
contribution margin of formal shoes = $220 - $100 = $120
contribution margin ratio of sport shoes = $120 / $220 = 0.545454
35% of total revenues come from sport shoes
weighted contribution margin ratio (it is the same for both products) = 0.545454 = 0.545
Jessica and Robert have two young children. They have $7,000 of qualified child care expenses and an AGI of $22,000 in 2019. What is their allowable child and dependent care credit considering their pre-credit tax liability
Answer:
$0
Explanation:
The computation of the their allowable child and dependent care credit is shown below:
In the case when the income is below $35,000 than full 35% would be allowed
But the qualified child expense would be limited to $6,000
So, here the amount would be
= $6,000 × 35%
= $1,860
Already there is a pre credit tax liability so $0 should be considered as it would not received any credit
you can acquire an existing business for $2 million. You are uncertain about future demand. There is a 40% chance of high demand, in which case the present value of the business will be $3 million. There is a 25% chance of moderate demand, and the associated present value is $1.5 million. Finally, there is a 35% chance of low demand, in which case the present value is $1 million. Draw a decision tree for this problem. What is the expected net present value of the business
Answer:
Expected net present value of the project = $1,925,000
Explanation:
The cost of acquiring business = $2,000,000
Expected net present value of the project = High demand NPV*High demand percent + Moderate demand NPV*Moderate demand percent + Low demand NPV*Low demand percent
Expected net present value of the project = $3,000,000 *40% + $1,500,000*25% + $1,000,000*35%
Expected net present value of the project = $1,200,000 + $375,000 + $350,000
Expected net present value of the project = $1,925,000
Conclusion: The cost of acquiring business is more than expected net present value, it is advisable not to invest in the project.