Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 15, Problem 2RQ
To determine
The profitable investment option.
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Students have asked these similar questions
Assume
you are the CEO of a company that has invested $5 billion in a COVID vaccine, but the
vaccine is not quite finished. At a recent company meeting, one of your colleagues reports that
there have been other vaccines coming on the market, and these are expected to reduce the
sales of your vaccine to $3 billion. If it would cost you $1 billion to finish the development of the
vaccine and make the product, should you go ahead and do so? What is the most you should
pay to complete the vaccine?
Consider a new business that invests $20
million into a plant to manufacture loaves of
bread. The market for bread is say around 100
million loaves and the new firm expects that it
will be able to obtain a market share of
around 5%. At that level of production, the
total cost of production is $10 million. Let us
say that it targets a 20% return on its
investment. What should the price of a loaf of
bread be? Use the principle of target rate of
return pricing. If the mark-up rate is 10% what
will the full-cost price be?
Hua Xing runs a lawn care service. Buying an additional riding lawn mower will cost $3,000
but would allow her firm to earn $1,000 of additional revenue each year for the next four
years. She expects marginal efficiency of capital to be at least 10%. Which statement is an
accurate description of this investment opportunity?
a)
Hua Xing should make the investment because turning $3,000 into $4,000 provides a
rate of return of 33%.
b) Hua Xing should not make the investment because it has a negative net present value.
c)
Hua Xing should not make the investment because it provides only a 5.16% return on
investment.
Od) Hua Xing should make the investment because the internal rate of return exceeds
10%.
Chapter 15 Solutions
Economics (Irwin Economics)
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