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Acme Landfill Company is considering the purchase of 10 better trash collection trucks. Each truck costs $50,000 and will last 7 years. the firm estimates that the entire purchase will increase its annual total annual revenues by $100,000 per year for as long as the trucks last.

a) If the real interest rate is 10%, should the firm buy the 10 trucks? You must support your answer by showing the details of your calculation and the formula that you use.

b) Would your answer to part (a) change if the interest rate fell to 8%? Show your calculation and briefly explain as necessary.



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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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A. Mary Graham has worked as a real estate agent for Piedmont Properties for 15 years. Her annual income is approximately $100,000 per year. Mary is considering establishing her own real estate agency. She expects to generate revenues during the first year of $2 million. Salaries paid to her employees are expected to total $1.5 million. Operating expenses (i.e. rent, supplies, and utility services) are expected to total $250,000. To begin the business, Mary must borrow $500,000 from her bank at an interest rate of 15%. Capital equipment will cost Mary $50,000. At the end of one year, the value of this equipment will be $30,000, even though the depreciation for tax purposes is only $5,000 during the first year.

(a) Determine the accounting profit for this venture. Show your calculations.

(b) Determine the economic profit for this venture. Show your calculations.

(c) Which of the costs of this firm are explicit, and which are implicit costs. 

B. A local restaurant owner recently purchased a liquor license issued by the state for $90,000. This license can be transferred or sold to another party. If the owner returns the license to the state only $75,000 is refundable. After selling alcoholic beverages for about one year, the restaurant owner realized that she was losing dinner customers and that her profitable restaurant business was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements, in various newspapers and restaurant magazines, across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000. Carefully identifying the sunk costs, would you recommend that she accept the $77,000 offer?

1. You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

A. The cost is the price of the oven minus any revenue made selling pizzas made in the oven.

B. Calculate the value of renting the oven to someone else and use that as your cost.

C. Amortize the cost over the 10-year life of the oven, resulting in a cost of $1,500 per year.

D. Expense the oven, taking a write-off for the entire price in the first year.

 

2. If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the sunk cost is

A. $0.

B. $93,750.

C. $31,250.

D. $125,000.

 

3. Which of the following is NOT a form of outsourcing?

A. paying your son to mow the lawn.

B. hiring an accountant to do your taxes.

C. taking a taxi to the airport.

D. replacing the windshield wipers on your car.

 

4. Why do many people choose to not read the manuals included with their new computer?

A. They perceive that learning by doing is more enjoyable than learning by reading.

B. They perceive that learning by doing decreases costs faster than learning by reading.

C. They perceive that learning by reading is not sophisticated.

D. They perceive that learning by doing is better than learning by reading.

 

5. When you have diminishing marginal returns to labor

A. variable costs fall as more output is produced.

B. variable costs remain constant as more output is produced.

C. fixed costs rise as more output is produced because you have to buy more equipment to compensate.

D. variable costs rise as more output is produced.

 

6. A durable good is a product that

A. is usable over a long period of time.

B. holds up well under abuse.

C. has had the same design over a long period of time.

D. is purchased only once.

 

7. Isocost lines

A. represents the combinations of inputs that have the same total cost.

B. represents the combinations of inputs that have the same marginal cost.

C. represent supply and demand for inputs at a given cost.

D. are the inverse of the isoquant lines.

 

8. Why might a police officer not pull over someone speeding two miles over the speed limit?

A. The opportunity costs of stopping the driver are too low.

B. The explicit costs of stopping the driver over are too high.

C. The opportunity costs of stopping the driver are too high.

D. The explicit costs of stopping the driver are too low.

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