YEAR IN/OUTFLOW OPERATING EXPENSES PROFIT

0
1,000.00
1
700.00
300.00
400.00
2
700.00
300.00
400.00
3
700.00
300.00
400.00
4
700.00
300.00
400.00
5
700.00
300.00
400.00
6
400.00
7
400.00
8
400.00
9
400.00
10
400.00

DEPRECIATION

TAXABLE INCOME

TAX

NCF
NCF @ 20%
1,000.00 1,000.00

Old Machine Parameters

Old Machine Cost

Revenue first 5 yrs
Revenue After 5 yrs
Old Machine Salvage
Value
Net Book Value of Old
Machine
Tax Credit
Cash Flow from Old
Machine
Old Machine Operating
Expense

1,000,000.00
700,000.00
400,000.00
350,000.00

400,000.00
22,500.00
372,500.00
300,000.00

New Machine Parameters

New Machine Cost

New Machine Delivery
Cost
New Machine
Installation Cost
New Machine
Opertating Expense
Tax Rate
Hurdle Rate

1,200,000.00
20,000.00
30,000.00
150,000.00
0.45
0.20

Old Machine
Year

Investment

1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
Old Machine

New Machine

1,000,000.00

Year

Year

1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00

Investment

1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00

1,200,000.00

Incremental Analysis
Year

NCF New Machine

- 1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00

877,500.00
482,500.00
446,500.00
410,500.00
374,500.00
338,500.00
137,500.00
137,500.00
137,500.00
137,500.00
137,500.00

New investment fails to meet investments criterion since NPV

negative at 20%

(Gotten from 2 years total sum of the years drepreciation)

(Salvage Value - Net Book Value) x Tax
(Salvage Value + Tax Credit)

Sales

700,000.00
700,000.00
700,000.00
700,000.00
700,000.00
400,000.00
400,000.00
400,000.00
400,000.00
400,000.00
400,000.00
400,000.00

Opertating Expenses

300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00
300,000.00

Delivery & Installation Cost

Sales

50,000.00

350,000.00
700,000.00
700,000.00
700,000.00
700,000.00
700,000.00
400,000.00
400,000.00
400,000.00
400,000.00
400,000.00

NCF Old Machine

s criterion since NPV

New - Old

310,000.00
280,000.00
250,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00

Operating Expenses

150,000.00
150,000.00
150,000.00
150,000.00
150,000.00
150,000.00
150,000.00
150,000.00
150,000.00
150,000.00

Hurdle Rate @ 20%

877,500.00
172,500.00
166,500.00
160,500.00
319,500.00
283,500.00
82,500.00
82,500.00
82,500.00
82,500.00
82,500.00

1.00
0.83
0.69
0.58
0.48
0.40
0.33
0.28
0.23
0.19
0.16

NPV @ 20%

(IRR - 10) / (20 - 10) = (0 - 125,948.38)

(IRR - 10) / 10 = -125,948.38 / -284,025
IRR - 10 = 10 * 0.443
IRR = 10 + 4.43 = 14.43%

My recommendation would change if t

Profit Before Tax

1,000,000.00
400,000.00
400,000.00
400,000.00
400,000.00
400,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00

Depreciation

333,333.33
266,666.67
200,000.00
133,333.33
66,666.67
-

Taxable Income

66,666.67
133,333.33
200,000.00
266,666.67
333,333.33
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00

Profit Before Tax

900,000.00
550,000.00
550,000.00
550,000.00
550,000.00
550,000.00
250,000.00
250,000.00
250,000.00
250,000.00
250,000.00

PV @ 20%

877,500.00 143,750.00
115,625.00
92,881.94
154,079.86
113,932.29
27,629.08
23,024.24
19,186.86
15,989.05
13,324.21

158,077.46

Depreciation

- 400,000.00
320,000.00
240,000.00
160,000.00
80,000.00
-

PV @ 10%

877,500.00
156,818.18
137,603.31
120,586.03
218,222.80
176,031.20
46,569.10
42,335.54
38,486.86
34,988.05
31,807.32

125,948.38

20 - 10) = (0 - 125,948.38) / (-158,077.46 - 125,948.38)

0 = -125,948.38 / -284,025.84

.43 = 14.43%

ndation would change if the hurdle rate is >= 14.43%

Taxable Income

900,000.00
150,000.00
230,000.00
310,000.00
390,000.00
470,000.00
250,000.00
250,000.00
250,000.00
250,000.00
250,000.00

Tax @ 45%

- 30,000.00
60,000.00
90,000.00
120,000.00
150,000.00
45,000.00
45,000.00
45,000.00
45,000.00
45,000.00
45,000.00
45,000.00

Profit After Tax

1,000,000.00
370,000.00
340,000.00
310,000.00
280,000.00
250,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00
55,000.00

Tax @ 45%

22,500.00 67,500.00
103,500.00
139,500.00
175,500.00
211,500.00
112,500.00
112,500.00
112,500.00
112,500.00
112,500.00

Profit After Tax

877,500.00
482,500.00
446,500.00
410,500.00
374,500.00
338,500.00
137,500.00
137,500.00
137,500.00
137,500.00
137,500.00
1,862,500.00

125,948.38
284,025.84

0.44

4.43
14.43

PASTELERIA
EVENT
80 cakes
90 cakes
100 cakes

FREQUENCY
25
10
15
50

(a) To make N44,000, he needs to produce 88 cakes

Without Information = N44,000
With Information

EVENT
80 cakes
90 cakes
100 cakes

(b) Raphael should not accept the company's offer for information because it

With Information

EVENT
80 cakes
90 cakes
100 cakes

The information is worth a maximum of 2.1% discount

PROBABILITY PROFIT
0.5
40,000.00
0.2
45,000.00
0.3
50,000.00

EMV
20,000.00
9,000.00
15,000.00
44,000.00

PROBABILITY PROFIT
0.3333333333
38,000.00
0.3333333333
42,750.00
0.3333333333
47,500.00

EMV
12,666.67
14,250.00
15,833.33
42,750.00

nformation because it has a lower EMV

0.979
PROBABILITY PROFIT
0.3333333333
39,160.00
0.3333333333
44,055.00
0.3333333333
48,950.00

0.021
EMV
13,053.33
14,685.00
16,316.67
44,055.00

Number of Assemblies
Percentage Loss
Total With Quality
Number Loss
Cost of Quality

5,000
50.00%
$35,000.00
2,500
$15.80

Total Sub-Contractor Cost

Percentage Loss

$79,000.00
50.00%

Fixed Production Cost

Fixed Cost/Unit
Variable Cost
Additional Cost for Defective
Quality
Total Internal Cost

$20,000.00
$4.00
$10.00

Fraction of parts not

meeting specifications
Probability
Parts not meeting
specifications
Cost not meeting
specifications
Cost meeting
specifications
Total Cost

EMV
$78,000.00

$8.00
$70,000.00

0
0.05

0.1
0.4

0.2
0.25

250

500

$0.00 $
$70,000.00
$70,000.00

2,000.00
$72,000.00
$74,000.00

$4,000.00
$74,000.00
$78,000.00

EMV value is less than sub-contractor cost so Kostplus Corporation should produce
WITHOUT PERFECT INFO

EMV
$76,300.00

$76,300.00

WITH PERFECT INFO

DO SUB-CONTRACT

DO INTERNAL
PRODUCTION

EMV
$78,000.00

0.3
0.15

0.4
0.1

0.5
0.05

750

1000

1250

$6,000.00

$8,000.00

$10,000.00

$76,000.00
$82,000.00

$78,000.00
$86,000.00

$80,000.00
$90,000.00

oration should produce the components internally

$3,500.00
F0
0.05
$29,600.00
F0.1
0.4

F0.2
0.25

$19,500.00

$11,850.00

F0.3
0.15
$7,900.00
F0.4
0.1
$3,950.00
F0.5
0.05

EMV on Cost
$79,000.00

F0

$70,000.00

$3,500.00

$74,000.00

$29,600.00

$78,000.00

$19,500.00

$82,000.00

$12,300.00

$86,000.00

$8,600.00

$90,000.00

$4,500.00

0.05
F0.1
0.4
F0.2
0.25

F0.3
0.15
F0.4
0.1
F0.5
0.05

$78,000.00

$78,000.00

$70,000.00
DO INTERNAL

$74,000.00
DO INTERNAL

$78,000.00
DO INTERNAL

$79,000.00
SUB-CONTRACT

$79,000.00
SUB-CONTRACT

$79,000.00
SUB-CONTRACT

0.2
bid contract
without weather forecast

0.5

0.8

E
Don"t bid contract

0.
5
H

0.55
bid contract

1.8
2
F

predict GOOD weather

Don"t bid contract

0.3
weather forecast

0.55

D
0

0.7

bid contract

-0.46
C

predict BAD weather

Don"t bid contract

Chance Node A
This has the original probabilities
P(S1)=0.2
P(S2) = 0.8
Chance Node B
Apply Bayes' theorem

Possible
Outcome

Good

Bad
Total

Original(prior) risk

P(s1) = 0.2

P(s2) = 0.8

Conditional
Probability

Joint Probability Revised ( posterior) risk

P(I1|S1) =0.7

P(I1|S1)P(S1) / (P(I1|
P(I1|S1)P(S1)= S1)P(S1) + P(I1|
0.14
S2)P(S2) = 0.47

P(I1|S2) =0.2

P(I1|S2)P(S2) / (P(I1|
P(I1|S2)P(S2) = S1)P(S1) + P(I1|
0.16
S2)P(S2) = 0.53
0.3*
1

Good weather

Bad weather

-1
0

bid contract

0.2

1.8
2
B

Good weather

Bad weather

0.8

-1

ontract

0.2

46
0.8

Good weather

Bad weather

-1
0

act

Chance Node C
Apply Bayes' theorem

Possible
Outcome

Original(prior) Conditional
risk
Probability

Good

P(s1) = 0.2

P(I2|S1) =0.3

Bad
Total

P(s2) = 0.8

P(I2|S2) =0.8

Joint Probability

0.7*

Revised
( posterior)
risk

0.06

0.09

0.64

0.91
1

Answers to questions

ii) Max worth of forecast service

EMV (with forecast) - EMV (without forecast0
=
550000 - 500000
50,000

i) (a)Max loss

Chance Node D

gotten from the sum of Joint probability values of Node B for good weather and Node C for bad w

weather and Node C for bad weather