10. You have been asked to graphically illustrate a specific option to alter production by drawing...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
10. You have been asked to graphically illustrate a specific option to alter production by drawing its payoff diagram. It relates to an industrial beer fermenter that can also be adapted to be used to ferment wine if the company chooses to switch from beer to wine production. This specific fermenter cost $100,000 initially to buy, which was $30,000 more than a fermenter that could only ferment beer. If the firm chooses to switch production, it will cost the firm $60,000 to re-format the machine so that it is able to ferment wine. Currently, the present value of the future cash flows associated with beer production is $450,000, while the present value of future cash flows associated with wine production is $410,000 (excluding any costs associated with reformatting the machine). Draw the profit diagram for the option described above. Label all axes, intercepts and turning points. Also indicate on the diagram with the letter "A" what current market conditions indicate about what the current profit and "moneyness" of the option described above. [8 marks] 10. You have been asked to graphically illustrate a specific option to alter production by drawing its payoff diagram. It relates to an industrial beer fermenter that can also be adapted to be used to ferment wine if the company chooses to switch from beer to wine production. This specific fermenter cost $100,000 initially to buy, which was $30,000 more than a fermenter that could only ferment beer. If the firm chooses to switch production, it will cost the firm $60,000 to re-format the machine so that it is able to ferment wine. Currently, the present value of the future cash flows associated with beer production is $450,000, while the present value of future cash flows associated with wine production is $410,000 (excluding any costs associated with reformatting the machine). Draw the profit diagram for the option described above. Label all axes, intercepts and turning points. Also indicate on the diagram with the letter "A" what current market conditions indicate about what the current profit and "moneyness" of the option described above. [8 marks]
Expert Answer:
Related Book For
Managerial Accounting A Focus on Ethical Decision Making
ISBN: 978-0324663853
5th edition
Authors: Steve Jackson, Roby Sawyers, Greg Jenkins
Posted Date:
Students also viewed these finance questions
-
Barans Manufacturing is developing the incremental cash flows associated with the proposed replacement of an existing stamping machine with a new, technologically advanced one. Given the following...
-
Jizan Industries is developing the relevant cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs related...
-
Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs...
-
Using real employed samples, multiple field studies indicate that fat women experience more negative outcomes than fat men. In one study conducted by Steven Gortmaker and colleagues and using over...
-
Which of the models shown below most accurately represents the hydrogen cyanide molecule, HCN? Write the electron-dot formula that most closely agrees with this model. State any concept or rule you...
-
Following data are given for internal shoe expanding brake as shown in Figure 16.11 (b): Force on each shoe \(=500 \mathrm{~N}\), internal radius of brake drum \((r)=200 \mathrm{~mm}, \mu=0.3\),...
-
P(155 < x < 172) The random variable x is normally distributed with mean = 174 and standard deviation = 20. Find the indicated probability.
-
Big Co. acquired 1,000 shares of voting stock in Little Co. for $100,000 cash. Little Co. currently has 10,000 shares of voting stock issued and outstanding. Little Co.'s shares are trading at $115...
-
Evaluate the limit: lim h-0 r(t + h) -r(t) h r'(t)=000 for r(t)=(t2, sint, -9)
-
Uber Technologies, Inc., is a ridesharing provider. In its 2019 annual report, the company reported deferred tax assets totaling about $11,230 million. The company also reported valuation allowances...
-
Firms X and Y are identical in all respects except for capital structure. These firms operate in a tax-exempt haven where firms and individuals pay no taxes. Current data on the financial structure...
-
Ladders, Inc., has a net profit margin of 5.2% on sales of $51.2 million. It has book value of equity of $38.6 million and total liabilities with a book value of $30.5 million. What is Ladders ROE?...
-
An open feedwater heater is used to take inlet stream of water vapor at 5 bar and 200C and have it leave as saturated liquid at 5 bar. This is accomplished by mixing it with an appropriate amount of...
-
Chutes & Co. has interest expense of $1.03 million and an operating margin of 10.7% on total sales of $30 million. What is Chutes interest coverage ratio?
-
Consider a tank containing 100 kg of water initially at 70C. Due to heat transfer, the temperature of water in the tank drops to 50C. The surroundings are at 10C. Calculate the lost work.
-
Your bank pays 2.8% interest per year. You put $1300 in the bank today and $750 more in the bank in one year. How much will you have in the bank in 2 years?
-
class UnaryExpression : public Expression { public: UnaryExpression(Expression* operand); double evaluate(); private: Expression* operand; }; class BinaryExpression : public Expression { public:...
-
Illini Company, Inc. Balance Sheet as of 12/31/20X0 Assets Current Assets: Cash $1,500,000 Accounts receivable, net 18,000 Inventory 50,000 Total current assets 1,568,000 Equipment 90,000 Goodwill...
-
Miller Company has two divisions, each of which is operated as a profit center. The Wheel Division charges the Molding Division $35 per unit for each unit transferred to them. Other data for the...
-
Memories Inc., which produces specialty picture frames, had the following summary cost information: Direct materials used .............. $24,000 Direct labor .................22,000 Factory rent...
-
Robyns Rocket Shop sells various types of fireworks and firecrackers. The following data were taken from Robyns detailed budgeted income statement for the month of June. Although the labor costs and...
-
LDDS continued to publicly report increasing profits and sales in the financial statements, which allowed it to acquire more companies with no limit to the growth of its stock price. True/False
-
LDDS suffered from high fixed costs coupled with a lack of technical knowledge and expertise in optimizing the configuration of circuits, which resulted in high line costs. True/False
-
WorldCom overstated its earnings by improper accounting for multiple element contracts. True/False
Study smarter with the SolutionInn App