Read The Following Scenarios And Complete The Cor 977600

Read The Following Scenarios And Complete The Cor

Read The Following Scenarios And Complete The Cor

Paper For Above instruction

This paper analyzes four distinct business scenarios involving investment decisions, cost analysis, advertising strategies, and financial valuation. Each scenario provides insights into decision-making processes faced by companies and individuals in real-world economic environments. The analysis aims to demonstrate comprehension of relevant costs, marginal analysis, advertising effectiveness, and net present value calculations, emphasizing careful evaluation of factors influencing strategic choices.

Scenario 1: Pharmaceutical Company’s Project Evaluation

The first scenario involves a pharmaceutical company considering whether to proceed with the development of a new drug. The company has already invested $150,000 in research and development and incurred $75,000 in initial clinical trials, which yielded promising results. The critical decision hinges on the relevant costs that will influence whether to continue with the project and how many doses to produce if the project proceeds.

Relevant costs pertain to those expenses that will be incurred only if the project continues or those directly affected by the decision. In this case, the relevant costs include the second round of clinical trials, estimated at a cost based on the number of doses and additional fixed costs. Specifically, the costs of ingredients ($2 per dose for an initial 150,000 doses), patent filing fees ($25,000), and the purchase of a new production line ($240,000) are all relevant as they entail immediate expenditures tied to the decision to proceed.

Long-term costs such as research and development ($150,000) and initial trial costs ($75,000) are sunk costs—they have already been spent and do not influence the decision about whether to proceed. Likewise, the costs of ingredients after production begins ($1 per dose) and packaging/distribution costs ($0.50 per dose) are relevant for determining the optimal number of doses to produce, as these are variable costs that depend directly on production volume. Advertising costs of $500,000 per year are relevant if these are ongoing expenses required to support sales, especially during the patent period.

Additional information needed includes projected revenue figures, estimated demand at different production levels, potential market share, and patent expiration timelines. Moreover, assumptions about the duration of production, the potential for generic competition after 17 years, and the costs associated with marketing and distribution should be clarified to provide a comprehensive analysis.

Scenario 2: Apple Farmer's Cost and Production Decision

The farmer's costs are depicted as fixed for 0 bushels and increasing with output, with total costs of $2,000 for producing one bushel of apples. The marginal cost (MC) per bushel can be calculated as the change in total cost divided by the change in quantity produced. Given the data:

  • Total cost at 0 bushels: $0
  • Total cost at 1 bushel: $2,000

Hence, the marginal cost of producing the first bushel is:

MC = \(\frac{\$2,000 - \$0}{1 - 0} = \$2,000\)

This indicates a high marginal cost, likely reflecting fixed costs rather than variable costs that increase with production. If the market price per bushel is $5.50, and marginal revenue (MR) equals price in perfect competition, the farmer should produce until marginal cost equals marginal revenue. Since MC ($2,000) exceeds MR ($5.50), the farmer should not produce any bushels, as doing so would incur a significant loss.

If the government imposes a tax that reduces revenue by $1 per bushel, the new marginal revenue becomes $4.50. Still, since the marginal cost remains at $2,000 per bushel, production should remain at zero. Essentially, the farmer should not produce unless variable costs are sufficiently low to justify the operation at prevailing prices.

Scenario 3: Advertising Budget Allocation

The company's advertising efforts across print, television, and internet media show varying effectiveness in attracting new customers. The data indicates:

  • Increased print advertising by $5,000 yields 50 new customers
  • Increased television advertising by $20,000 yields 175 new customers
  • Increased internet advertising by $2,500 yields 30 new customers

To determine where the additional $100,000 should be allocated, the company should analyze the cost per new customer for each medium:

  • Print: \(\frac{\$5,000}{50} = \$100\) per customer
  • Television: \(\frac{\$20,000}{175} \approx \$114.29\) per customer
  • Internet: \(\frac{\$2,500}{30} \approx \$83.33\) per customer

Based on cost efficiency, internet advertising provides the lowest cost per new customer, implying that a larger share of the additional budget should be allocated here for maximum impact. To verify this decision, the company should monitor subsequent advertising campaigns' effectiveness, confirming that the observed customer gains are consistent and sustainable. Additionally, return on investment (ROI) calculations and customer lifetime value assessments can provide further validation of the optimal allocation choice.

Scenario 4: Investment Project NPV Calculation

The project costs $40,000 initially and generates returns over three years: $15,000 in Year 1, $20,000 in Year 2, and $10,000 in Year 3. The company's weighted average cost of capital (WACC) is 10%. To assess whether the company should undertake the project, the net present value (NPV) must be calculated.

The NPV formula is:

NPV = \(\sum_{t=1}^n \frac{C_t}{(1 + r)^t} - C_0\)

Where:

  • C0 = initial investment = $40,000
  • Ct = cash inflow in year t
  • r = discount rate = 10%

Calculating the present value of each cash flow:

Year 1: \(\frac{\$15,000}{(1 + 0.10)^1} = \$13,636.36\)

Year 2: \(\frac{\$20,000}{(1 + 0.10)^2} = \$16,529.75\)

Year 3: \(\frac{\$10,000}{(1 + 0.10)^3} = \$7,513.15\)

Total present value of inflows: \$13,636.36 + \$16,529.75 + \$7,513.15 = \$37,679.26

NPV = \$37,679.26 - \$40,000 = -\$2,320.74

Since the NPV is negative, the company should not undertake the project as it would diminish shareholder value.

Conclusion

Each scenario underscores critical principles in business decision-making. In project evaluation, understanding relevant costs, both fixed and variable, guides go/no-go choices. Marginal analysis informs production decisions, while strategic advertising investments require cost-benefit assessments to maximize customer acquisition efficiently. Lastly, financial valuation through NPV offers a quantitative basis to accept or reject investment opportunities. By meticulously analyzing costs, revenues, and time-value considerations, managers can make informed decisions that align with corporate goals and financial sustainability.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Mankiw, N. G. (2014). Principles of Economics. Cengage Learning.
  • Parkin, M. (2018). Economics. Pearson.
  • Newman, P., & Smith, J. (2019). Cost Analysis and Decision Making. Journal of Business Economics, 45(2), 134-150.
  • Harvard Business Review. (2020). Strategies for Effective Advertising. Harvard Business Publishing.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
  • Lord, R., & Jankowski, J. (2021). Practical Guide to Cost Management. Cost Management Journal, 15(4), 250-268.
  • Kotler, P., & Keller, K. L. (2016). Marketing Management. Pearson.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2013). Corporate Finance. McGraw-Hill Education.
  • Investopedia. (2022). Net Present Value (NPV) and Discounted Cash Flow (DCF). Retrieved from https://www.investopedia.com/terms/n/npv.asp

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