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• in reply to: Finance Questions #16018

Solution – Holding Rate of return = (1+10%)^5-1
= 77.15%

in reply to: Finance Questions #16008

Solution
Case 1

(1+ (-).10) * (1+.30) ^2 = .90*1.96 = 1.521 = 15.21%

Case 2

(1+.30) * (1+(-).10) ^2 = 1.30*.81= 1.053 = 10.53%
Case 1 is better off.

in reply to: NPV IRR #15995

Solution
NPV for Red Pig
```Cash outflow = 400 Cash inflow = 250/(1+.09)1 + 300/(1+.09)2 = 229.35 + 252.50 = 481.86 NPV = + 481.86 - 400 = - 81.86 ```

NPV for Caffeine Delight
```NPV = Present Value of Net Cash inflow Cash outflow = 200 Cash inflow = 140/(1+.09)1 + 179/(1+.09)2 = 128.44 + 150.66 = 279.10 NPV = Present value of Net Cash inflow = 279.10 – 200 = 79.10 ```

As per the NPV method we should opted for the red pig new energy drink.
IRR Calculations
IRR denotes that NPV = 0
IRR of red pig is 23%
IRR of caffeine Delight is 36%

As in this condition we use to calculate the modified IRR also called the incremental IRR.
Incremental IRR is calculated only o the incremental cash flows. That is extra cash inflows and cash outflows on the margin that result from choosing one project over another.

```0 = Cash outflow + cash Inflow C1/(1+i)1 + cash Inflow C2/(1+i)2 0 = (-) 200 + 110/(1+i)1 + 121/(1+i)2 Modified IRR = 9.5% ```
So, the modified incremental IRR is greater than the cost of capital for red pig energy drink. Coca cola corporation should use the red pig energy drink.

• This reply was modified 5 years, 8 months ago by amandeep kathuria.
• This reply was modified 5 years, 8 months ago by amandeep kathuria.
• This reply was modified 5 years, 8 months ago by admin.
• This reply was modified 5 years, 8 months ago by admin.
• This reply was modified 5 years, 8 months ago by admin.
in reply to: General Equilibrium Analysis #15764

Contract curve is the locus of all Pareto optimal allocations in a general equilibrium model. The allocations which are Pareto optimal for both consumer A and B can be found on the points where their indifference curves are tangent to each other. This implies that at the points of contract curve the indifference curves of consumer A and B must have same slope or in terms of economics, for Pareto optimal allocations, the marginal rate of substitution for A and B should be equal.

For Pareto optimal allocations:

To be points on contract curves the allocations should also be feasible. Thus, we also require the feasibility condition, which states that the sum of allocation of good i with A and B must be equal to the sum of endowment of good i with both A and B

• This reply was modified 5 years, 9 months ago by amandeep kathuria.
• This reply was modified 5 years, 9 months ago by amandeep kathuria.
• This reply was modified 5 years, 9 months ago by admin.
• This reply was modified 5 years, 9 months ago by admin.
in reply to: What is a Financial Modelers main objective #15752

A Financial Modeler’s main objective when gathering internal information for a valuation is thorough analysis to gain an adequate understanding of the subject company’s operational management and earnings ability

in reply to: What is Principles of Marketing #15721

in reply to: What is Market failure? #15713

This refers to those situations in which the market cannot function properly. It involves the cases of externality and public goods.

Externality refers to that situation in which some economic activity is not taken into account by market. In other words, market does not exist for some activities. For example: pollution dumped into river. There are two types of externality: positive and negative.

Let’s first discuss negative externality. It refers to that situation in which one economic agent affects other’s activity without involving any price mechanism or market. For example: consider a person Bart who manufactures steel and his firm is located near a river. He disposed all garbage in that river. As river does not belong to anyone, he does not add cost of that factor. Thus, while taking output decision, he overproduces output. There is another person, Lisa who is fisher and fishes in the same river. Pollution affects her activity, but since there is no property right, she can’t be compensated for that pollution through market mechanism.

Whenever there is negative externality, there is overproduction. Reason is that the producer does not consider the marginal damage it cost to other individual. In the above case, if firm’s optimum output would be based on social cost i.e. private cost + marginal damage. Then, output produced would be optimum.

There are various methods to solve negative externality. There are some private response and some public response. In private response, there are established property rights, mergers, social convention.

In property right, one person is assigned property right, and then the other party pays to use the resources. Suppose Bart possess property right, then Lisa will pay him to not to produce. If Lisa possesses property right, then Bart will pay to dump the garbage. On the other hand, when mergers take place, firm internalize the externality and thus maximize the total profit.

In public response, we have pigouvian taxes, subsidies etc. under pigouvian taxes, government impose a tax equal to marginal damage at the efficient output. Thus, it increases the cost of firm and firm automatically produces that level of output.

Positive externality: in this, one economic agent increases other’s firm productivity. If one firm conduct researches, then it provide other firm to either use that new technique to reduce their cost or give them some bases to further conduct research. These are the examples of positive externality.

Public goods- these are non- rival and non- excludable. Non rival implies that the good is available even after it is used by another individual. This means that consumption by one individual doesn’t affect other individual consumption of the same commodity. Non- excludable implies that there is no price mechanism which could stop anyone to use that good. This means that we cannot exclude any individual to use that god whether he pays or not.

These two properties of public good make provision of these goods by government. As goods are non excludable, it becomes questionable that how the revenues for provision of public good to be collected. This also cause free rider problem. As the individual knows that once the good is provided, everyone will be given. So, it is better to not to pay for it. Thus, the government finances these goods through tax revenues. But, it does not distribute the burden among individuals efficiently.

So, these are two cases of market failure.

#15704

Ans: (c) The opportunity cost of seeing Eric Clapton is \$10 (which is the extra benefit that a person gets on seeing Dylan), since it is the benefit of next best alternative foregone. On seeing Clapton, the person foregoes a benefit worth \$10, which is therefore the opportunity cost.

#15702

Answer: According to the law of diminishing returns, the proportionate increase in inputs leads to an increases in output, which is less than proportionately.

Among the given options, only (a) is consistent with the law of diminishing returns.

in reply to: Price Elasticity of demand #15680

Answer: (A) Food is an inferior good. For inferior goods, the income elasticity of demand is negative, implying that the quantity demanded of inferior good declines as income increases. Since expenditure (P*Q) on food is declining, even though the prices of food have not declined, it means that the demand for food has declined with rise in income.

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