BusyBody Company expects its November sales to be 25% higher than its October sales of $240,000. Purchases were $100,000 in Octo
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Answer: d. $1,534 positive net present value of the cash flows. Based on present value considerations, Dobson Construction should buy the machine.
Explanation:
To calculate the Net Present Value, we take the present values of all the future cashflows and subtract the initial cost from this amount.
Now, the cashflows are stable and this means that we can use the Present Value of an Annuity factor to find out the present value of the cashflows. We can then use a simple present value formula to find out the PV of the sale price.
I have attached a table that shows the PVIFA factors to make our calculations easier.
With interest rates at 12% and the year being 8 years, the PVIFA factors is 4.9676
Calculating therefore we have,
= 15,000 * 4.9676
= $74,514
This is the present value of 8 years of $15,000 cash flows.
In the same year, the machine can be sold for $5,000 so the present value of that is,
= 5000 / ( 1 + 12%)^8
= $2,020
Adding those together we get,
= 74,514 + 2,020
= 76,534
= $76,534
Subtracting the original cost we have,
= 76,534 - 75,000
= $1,534 in positive cashflow.
Net Present Value = $1,534
This means that Based on present value considerations, Dobson Construction should buy the machine due to a $1,534 positive net present value.
Answer:
In order to maximize average daily profit, optimal number of reservations = 100 rooms.
Explanation:
As for the provided information, we have
Total number of rooms = 100
Chances of guests not arriving = 5%
Therefore, guests to arrive = 95%
Thus, bookings = 100/95% = 105.26
Rounding off we have 105 rooms,
Let us assume, all rooms are booked and no cancellation is done, in that case,
Total revenue = $150 100 = $15,000
Less: Overbooked charges = $200 5 = ($1,000)
Less: Variable Cost = $30 100 = ($3,000)
Thus total revenue will be $11,000
In case of booking of 100 rooms the net revenue in case of 5% cancellations, shall be:
Rooms booked = 100 - 5% = 95
Revenue = 95 $150 = $14,250
Less: Variable Costs = 95 $30 = ($2,850)
Thus total revenue = $11,400
Since profit in case of booking 100 rooms is more in any case, even in case of least cancellation the revenue will increase.
Thus, this is the optimal number of reservations = 100