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A software company is considering translating its program into French.  Each unit of the program sells for $50 and incurs a variable cost of $10  to produce

PROBLEM 35

A software company is considering translating its program into French.  Each unit of the program sells for $50 and incurs a variable cost of $10  to produce. Currently, the size of the market for the product is  300,000 units per year, and the English version of the software has a  30% share of the market. The company estimates that the market size will  grow by 10% a year for the next five years, and at 5% per year after  that. It will cost the company $6 million to create a French version of  the program. The translation will increase its market share to 40%.  Given a 10-year planning horizon, for what discount rates is it  profitable to create the French version of the software?

PROBLEM 39

You are thinking of starting Peaco which will produce Peakbabies, a  product that competes with Ty’s Beanie Babies. In year 0 (right now),  you will incur costs of $4 million to build a plant. In year 1, you  expect to sell 80,000 Peakbabies for a unit price of $25. The price of  $25 will remain unchanged through years 1 to 5. Unit sales are expected  to grow by the same percentage (g) each year. During years 1 to 5, Peaco  incurs two types of costs: variable costs and SG&A (selling,  general, and administrative) costs. Each year, variable costs equal half  of revenue. During year 1, SG&A costs equal 40% of revenue. This  percentage is assumed to drop 2% per year, so during year 2, SG&A  costs will equal 38% of revenue, and so on. Peaco’s goal is to have  profits for years 0 to 5 sum to 0 (ignoring the time value of money).  This will ensure that the $4 million investment in year 0 is paid back  by the end of year 5. What annual percentage growth rate g does Peaco  require to pay back the plant cost by the end of year 5?

PROBLEM 43

The file P02_43.xlsx contains a template for a car loan. Specifically,  once values are entered in the blue cells, you need to enter formulas in  the gray cells to calculate the amount financed, the monthly payment  (assuming that monthly payments stay the same throughout the term of the  loan), the total interest paid, and an amortization schedule. For the  latter, fill in the entire gray area with formulas, but use IF functions  so that blanks appear past the term of the loan.

PROBLEM 45

A project does not necessarily have a unique IRR. (Refer to the previous  problem for more information on IRR.) Show that a project with the  following cash flows has two IRRs: year 1, $20; year 2, $82; year 3,  $60; year 4, $2. (Note: It can be shown that if the cash flow of a  project changes sign only once, the project is guaranteed to have a  unique IRR.)

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