Reference no: EM132565760

Question 1: Your company manufactures widgets. The fixed cost incurred (independent of the number of widgets produced) each year is $80,000. The variable cost per widget is $0.25. The sale price of each widget is $1.00. The price and the costs are expected to remain unchanged over time. In year 1, the company expects to sell 100,000 widgets. It expects its sales to increase at the rate of 4% a year forever. The discount rate is 10%. Ignore taxes. What is the value of this company?

Question 2: You usually go to the theater to see a lot of movies. Now you are considering buying a DVD player and renting movies instead. You currently pay $9 per movie when you go to the theater but if you buy the DVD player you will have to pay only $5 per movie rental. You estimate that the DVD player will cost $400 (at t = 0) and will last 3 years. Except for cost, you are indifferent to seeing movies at home or in the theater. Assume that the cost of theater tickets and rental payments occur at the end of each month and that you use the DVD player only to watch movies. Assume that you watch the same number of movies every month. Your discount rate is 1% per month. Assume that there is no inflation. How many movies per month must you watch for the DVD player purchase to be a smart purchase?

Question 3: You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 5%, how much must you set aside each year to make sure that you will have $2 million in the account on your 65th birthday?

Question 4: You have just turned 40 years old and are trying to decide who much money to put into your retirement plan. The plan works as follows: Every dollar in the plan earns 7% per year. You cannot make withdrawals until you retire on your sixty-fifth birthday. After that point, you can make withdrawals as you see fit. You decide that you will plan to live to 95 and work until your turn 65. You estimate that to live comfortably in retirement, you will need $250,000 per year starting at the end of the first year of retirement and ending on your 95th birthday. You already have $200,000 in the retirement plan. You will contribute the same amount to the plan at the end of every year that you work, starting next year. How much do you need to contribute each year to fund your retirement?