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ETMA 02

ETMA 02

Question 1 a:

The number of meals required to be sold in order to achieve a profit of 300 pounds is 634 meals per week.

Turnover2536

Operating Cost

Materials1395

Other Exp254

Staff127

Building OC460

2236

Profit300

Question 1 b:

Breakeven sales for the both the proposals is calculated below in the table.

Est. Sales

814

211

1.6

6

Revenue

1302.4

1266

Fixed Cost

610

282

VC

691.9

983.26

Profit

0.5

0.74

Question 1 c:

The sales estimates are very low which could cause the company to face high losses. But if the breakeven point is achieved then the company would be in no profit and no loss zone but that point is quite high compared to the estimates.

Question 2 a:

A

2011

2012

2013

2014

2015

Traffic

5.5

7.7

9.9

12.1

14.3

Cost

4.4

5.5

7.15

8.25

9.9

Netflows

1.1

2.2

2.75

3.85

4.4

B

2011

2012

2013

2014

2015

Pvt Traffic

2.5

3.5

5

6.5

7.5

Com Traffc

3.45

4.6

5.85

6.5

7.8

Cost

4.8

6

7.8

9

10.8

Netflows

1.15

2.1

3.05

4

4.5

Question 2 b:

A

B

Cost

-10

-14

Year 1

1.1

1.15

Year 2

2.2

2.1

Year 3

2.75

3.05

Year 4

3.85

4

Year 5

4.4

4.5

NPV

($1.03)

$0.80

Question 2 c:

Clearly from the above calculations, Ship B should taken as this ship provides a positive Net Present Value. Let us first consider the theoretical meaning of positive NPV.

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

An investment that is expected to have a zero return is not a wise financial decision. With a return of zero, it would be better if the money were not invested at all. However, one measure of investment worth measures the cost of the investment in comparison to its expected future cash flows. Net Present Value is a method used to assess the worth of an investment in comparison to the risk associated with the expected cash flows.

The present value of an asset is a measure of the asset's worth at time zero, or the time at which the asset is valued. However, taking into account the cost of the asset, the Net Present Value is the difference between what an asset is worth and what it costs. This relationship can be expressed as:

Net Present Value = Present Value of All Future Cash Flows - Cost of the Asset

An asset with a positive Net Present Value is expected to bring wealth to its owner because it is worth more than it costs. Of course, since the present value is based on expected cash flows, there is no guarantee that it will bring wealth. An asset with a negative Net Present Value would not be purchased because the asset costs more than it is worth. This would be like buying a car for $20,000 when it has a sticker price of $18,000.

The problem many novice investors have occurs when the Net Present Value of an asset is zero. A Net Present Value of zero simply means that the asset is worth what it costs. In other words, given the risk of realizing the expected future cash flows of the asset, the price is perfectly in line with the risk. An asset with a Net Present Value of zero is expected to create wealth equal to the risk associated with purchasing the asset; it is a fair ...

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