### Positive accounting profits

##### Reference no: EM131368184

1. A firm can spend \$1,000,000 today on a project that will generate \$2,000,000 of revenue exactly 10 years from now. Should the firm do this project? Evaluate using the net present value (NPV) criterion and a discount rate of 7%. (This is a simplified question that you must answer; the answer "insufficient information" is unacceptable.)

2. Biff owns and operates a golf driving range on land that he also owns. Last year his accountant calculated that his driving range makes \$50,000 profits per year. Last year a property management company offered to lease Biff's land from him for \$80,000 per year forever. Calculate the economic profits of Biff's driving range last year. If the property management company offers the same land lease deal to Biff this year, should he take the deal? Explain why or why not, and use your calculation of Biff's economic profits in your explanation. (This is a simplified question that you must answer; the answer "insufficient information" is unacceptable.)

3. (This is a simplified question that you must answer; the answer "insufficient information" is unacceptable.) Tara is considering leaving her current job, which pays \$56,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market research, she projects that she can sell 160,000 units during the first year at a price of \$20 per unit. She expects annual overhead costs and operating expenses amounting to \$3,160,000.

a. If Tara decides to embark on her new venture, what will her accounting costs be during the first year of operation? Her opportunity costs? (Assume that her cost projections are accurate)

b. Based upon her projections, should Tara leave her job and start the business? Explain why or why not, using a calculation of economic profits in your answer.

c. Consider the estimated selling price of the pens--\$20; suppose that she is unsure that this projected selling price is accurate and she wishes to calculate alternate selling prices. (Assume that here sales projection of 160,000 units is accurate, and her cost projection of \$3,160,000 is also accurate.) What price per pen would she need to charge in order to earn \$1 of positive accounting profits? \$1 of positive economic profits? (Round your answers to the nearest penny, if necessary.)

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