You work as the finance manager for a local factory. Unfortunately, the factory has recently been...
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You work as the finance manager for a local factory. Unfortunately, the factory has recently been ordered to engage in environmental remediation because of historic pollution issues. The EPA has given the factory 5 years to complete the remediation. The owner of the factory, Mr. Hugh Jones, has asked you to identify the best time to pay for the environmental remediation. Using the information below, please answer the following questions regarding the enviornmental remediation project. Upload your responses into Blackboard. Be sure to include the calculations and/or Excel file supporting your answers. If I cannot follow your analysis, you will not get full credit Data on Potential Investments • If the environmental remediation is not completed, the government will fine the factory $225,000. • The environmental remediation will take one year to complete. Thus, the project must be begun by year 4 if it is to be completed on time •The cost of the remediation depends on when the project is begun: Year starting Remediation Year O (Today) Year 1 Year 2 Year 3 Cost of Remediation $100,000 $125,000 $140,000 $180,000 The factory's cost of capital is 20% • Mr. Jones is the sole owner of the factory, and he will ultimately make the final decision of when (and if) to begin the environmental remediation. Since Mr. Jones is the owner of the factory any money spent on environmental remediation means less money in his pocket. • Mr. Jones values the present significantly more than the future, and you estimate that he has a hyperbolic discounting factor of 3 = 0.80 Questions 1. What is the optimal time (if at all) to begin the environmental remediation project ignoring Mr. Jones' hyperbolic discounting? 2. From the perspective of year 0, when would Mr. Jones want to schedule the remediation project considering his hyperbolic discounting? 3. Mr. Jones doesn't need to approve the project until right before the project is ready to begin. Will the project begin in the year it was scheduled? Explain your answer. 4. What year (if ever) will Mr. Jones actually approve the project? 5. How does hyperbolic discounting explain the tendency of decision makers to engage in procrastination? 6. Can you identify another situation where hyperbolic discounting can distort financial decision making? Explain your answer. You work as the finance manager for a local factory. Unfortunately, the factory has recently been ordered to engage in environmental remediation because of historic pollution issues. The EPA has given the factory 5 years to complete the remediation. The owner of the factory, Mr. Hugh Jones, has asked you to identify the best time to pay for the environmental remediation. Using the information below, please answer the following questions regarding the enviornmental remediation project. Upload your responses into Blackboard. Be sure to include the calculations and/or Excel file supporting your answers. If I cannot follow your analysis, you will not get full credit Data on Potential Investments • If the environmental remediation is not completed, the government will fine the factory $225,000. • The environmental remediation will take one year to complete. Thus, the project must be begun by year 4 if it is to be completed on time •The cost of the remediation depends on when the project is begun: Year starting Remediation Year O (Today) Year 1 Year 2 Year 3 Cost of Remediation $100,000 $125,000 $140,000 $180,000 The factory's cost of capital is 20% • Mr. Jones is the sole owner of the factory, and he will ultimately make the final decision of when (and if) to begin the environmental remediation. Since Mr. Jones is the owner of the factory any money spent on environmental remediation means less money in his pocket. • Mr. Jones values the present significantly more than the future, and you estimate that he has a hyperbolic discounting factor of 3 = 0.80 Questions 1. What is the optimal time (if at all) to begin the environmental remediation project ignoring Mr. Jones' hyperbolic discounting? 2. From the perspective of year 0, when would Mr. Jones want to schedule the remediation project considering his hyperbolic discounting? 3. Mr. Jones doesn't need to approve the project until right before the project is ready to begin. Will the project begin in the year it was scheduled? Explain your answer. 4. What year (if ever) will Mr. Jones actually approve the project? 5. How does hyperbolic discounting explain the tendency of decision makers to engage in procrastination? 6. Can you identify another situation where hyperbolic discounting can distort financial decision making? Explain your answer.
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Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
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