Question 1: A company is considering a project which is expected to produce the following profits in current terms over the next three years. Cash flows are expected to be subject to inflation of 5% over the period. If depreciation will be $3,000 per annum and the company real cost of capital is 8%, what is the present value of the return from the project?

Year 1 $16,000

Year 2 $22,000

Year 3 $18,000

Question 2:

A company has the choice between two projects, A and B, both in the communications sector. The profits earned from each project will depend upon the growth of the market for communications. There is a 70% chance of moderate growth and a 30% chance of high growth. If the growth is moderate, A will earn an NPV of $500m and B will earn an NPV of $750m. If growth is high, A will earn an NPV of $2,000m and B will earn an NPV of $600m. The company could spend money on a market analysis to determine how likely it is that the market will grow moderately or at a high rate. However, it is believed that the no analysis will be 100% correct but that it will have an 80% chance of correctly predicting the market. How much should the firm invest in the market analysis in $m? Please state answer in $m

Question 3:

A factory making a single product has determined that the total cost equation for the production costs can be given as: y = 15,000 + 36x where y = total costs and x = the number of units produced. The marketing department has researched the current demand for the product and has found that at a selling price of $150, 15,000 units will be sold but that will fall to 10,000 units if the price rises to $175. Based on these findings the sales department calculated the optimal price for the product. By how much would this price change if the production cost equation turned out to be y = 16,000 + 34x rather than the version used in the original calculation? Give answer to the nearest $1:

Question 4: Identify the correct terms in the following statements about pricing policies:

A firm is not likely to be successful in using a market skimming pricing policy is the demand for its product is elastic/inelastic.

It is easier to maintain the skimming approach after the introductory phase where barriers to entry are low/high.

Penetration pricing differs from price skimming as the initial price is set low/high since barriers to entry are low/high.

Where a product is sold at a lower price than the rest of the market providers to secure greater market share it is known as discount pricing/loss leading/product bundling.

Where a product is sold at a low price but the complementary products are sold at a high mark-up it is known as discount pricing/loss leading/product bundling. Where a group of products are sold together at an attractive price it is known as discount pricing/loss leading/product bundling.

Choose your options from the choices indicated by a "/" and type your answer in sequence below.

Question 5:

A company has a cost of capital of 10%. It wishes to appraise a project to be carried out over the next three years.

Sales figures are highly dependent on the growth of the market and the following estimates have been made.

Growth rate Sales revenues Sales revenues Sales revenues Probability

Year 1 Year 2 Year 3

$ $ $

Growth rate A 20,000 22,000 27,000 0.3

Growth rate B 35,000 38,000 46,000 0.2

Growth rate C 45,000 47,000 52,000 0.4

Growth rate D 96,000 110,000 125,000 0.1

The contribution margin is also uncertain but the following estimates have been provided:

Contribution margin Probability

0.2 0.3

0.25 0.2

0.3 0.3

0.35 0.2

If fixed costs are known to be $5,000, what is the expected net present value of the project over the three year period?

Please state answer to the nearest $