Economics Question
1. Discussion Question
In Chapters 8 , 9, and 10 of Ross, et al (2022) textbook you learned about stock valuation, net present value concept, and valuation capital investments. View the following two videos:
Common Stock Valuation. (n.d.). Www.youtube.com. Retrieved July 19, 2022, from https://www.youtube.com/watch?v=R12dVdRbVkg
Chapter 9: Net Present Value and Other Investment Criteria. (n.d.). Www.youtube.com. Retrieved July 19, 2022, from https://www.youtube.com/watch?v=-Xr9r136lag
Once viewed discuss the following with your peers:
In June 2017, BMW announced plans to spend $600 million to expand production at its South Carolina plant. The new investment would allow BMW to prepare for the new X model of SUVs. BMW apparently felt it would be better able to compete and create value with a U.S.-based facility. In fact, BMW expected to export 70% of the vehicles produced in South Carolina. Also in 2017, noted Taiwanese iPhone supplier Foxconn announced plans to build a $10 billion plant in Wisconsin, and Chinese tire manufacturer Wanli Tire Corp. announced plans to build a $1 billion plant in South Carolina.
- What are some of the reasons that foreign manufacturers of products as diverse as automobiles, cell phones, and tires might arrive at the same conclusion to build plants in the United States?
Using a graphic organizer of your choice, create a visual graphic that explains your answer to the question below.
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A graphic organizer, also known as a knowledge map, concept map, cognitive organizer, advance organizer, or concept diagram is a tool that uses visual symbols to express knowledge and concepts through relationships between them. The main purpose of a graphic organizer is to provide a visual aid to facilitate learning.
Examples of Graphic Organizers:
2. Capital Budgeting Assignment
Based on the content covered in Week 6 and Chapters 8, 9, and 10 of the Ross, et al. (2022) text, students learned about stock valuation, net present value concept, and capital investment decisions. Students should address the following:
Study the following capital budgeting project and then provide explanations for the questions outlined below:
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers (stringed instruments). The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million on an after-tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows:
The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $415,000 per year, and variable costs are 15% of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Networking capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%.
Now provide detailed explanations for the following:
Explain how you determine the initial cash flows.
Discuss the notion of sunk costs and identify the sunk cost in this project.
Verify how you determine the annual operating cash flows.
Explain how you determine the terminal cash flows at the end of the project’s life.
Calculate the NPV and IRR of the project and decide if the project is acceptable.
If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock.
Provide detailed and precise explanations and definitions. Comment on your findings and provide references for content when necessary. Explain everything in your own words.
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