Applied Managerial Economics

Paper instructions:
The board of directors at AutoEdge is actively discussing several options to address flagging revenue. One option continues to surface during each board meeting; that is, relocating the manufacturing operation back to the United States. Longtime Chief Financial Officer, Ingrid Adams, leads the group that is in favor of this option.

Ingrid Adams approaches you in the company break room.

“Hello,” she says. “I’m glad I saw you.”

“Hi,” you say. “What can I do for you?”

“I have a question about economics,” she says. “I think you can help me explain something to some shareholders on the board.”

“Economics! My favorite subject,” you say. “What’s your question?”

“If AutoEdge decided to increase its prices and return to the United States,” she says, “how would this action affect consumer demand? I want to know your opinion about elasticity.”

“Sure,” you say. “So you want to know if the elasticity for auto parts is considered to be relatively inelastic, relatively elastic, unitary elastic, perfectly elastic, or perfectly inelastic. Right?”

“Exactly,” she says.

“I have an opinion,” you say. “Do you want to talk about it now, or do you want something in writing?”

“Something in writing would be best,” she says. “Would you explain your opinion so that I can respond to questions from other members of the board, too?”

Applied Managerial Economics

Order Description

Over lunch, you and Lester meet to discuss your next assignment.

“The board of directors has been working on the cost and benefits of various expansion options,” he says. “We have developed the numbers for one scenario in this spreadsheet, and we want you to review it,” he says handing it to you.

“So you’re looking for me to use present value analysis to discount the cash flows,” you say. “Should I include the calculations for net income, operating cash flows, free cash flows, and the present value cash flows and net present value (NPV) in the spreadsheet?”

“Yes,” he says. “We want to know if the project has a positive or negative NPV. Also, in 500 words or less, explain the implications for AutoEdge and its shareholders if there is a positive NPV or, conversely, if there is a negative NPV.”

“This will be interesting,” you say.

“Good,” he says. “Oh, and one more thing. In addition to considering the NPV value, we want to know what kind of economic assumptions you think the board should consider. Articulate the economic and political risks with the strategy, and list options to overcome them. How will this decision affect the share price and the value of the company? In light of all this information, would you support the option for expansion abroad or relocate back to the United States? Include an explanation of your response, as well.”

“I’ll get right on it,” you say.

Complete spreadsheet and 500 words for assignment

Year        Today    Time 1    Time 2    Time 3    Time 4    Time 5    Time 6
Cost of Capital            6%    6%    6%    6%    6%    6%

(US$ in millions)
Revenue            $30.10     $34.20     $38.10     $40.40     $45.60     $50.00
Selling, General, Admin            ($16.10)    ($17.20)    ($18.90)    ($19.50)    ($21.40)    ($24.30)
Depreciation            ($4.10)    ($4.40)    ($4.80)    ($4.90)    ($5.30)    ($5.70)
Interest Expense            ($0.45)    ($0.56)    ($0.69)    ($0.73)    ($0.78)    ($0.81)
Taxes            ($1.10)    ($1.30)    ($1.70)    ($1.90)    ($2.00)    ($2.10)

Change in fixed assets            ($1.30)    ($2.40)    ($0.90)    $0.00     ($4.90)    ($2.10)

Students need to calculate the following:

Net Income            $8.35
Depreciation added back            $4.10
Change in fixed assets            ($1.30)
Free Cash Flow            $11.15

Pvif factor            0.943    0.890    0.840    0.792    0.747    0.705
PV Cash flows            $10.51

Value of future flows
Initial expenditure        ($18.00)
NPV

The initial project was funded using an $18,000,000 bank loan carrying a 6% interest rate, i.e., the cost of capital.

Applied Managerial Economics

Order Description

Over lunch, you and Lester meet to discuss your next assignment.

“The board of directors has been working on the cost and benefits of various expansion options,” he says. “We have developed the numbers for one scenario in this spreadsheet, and we want you to review it,” he says handing it to you.

“So you’re looking for me to use present value analysis to discount the cash flows,” you say. “Should I include the calculations for net income, operating cash flows, free cash flows, and the present value cash flows and net present value (NPV) in the spreadsheet?”

“Yes,” he says. “We want to know if the project has a positive or negative NPV. Also, in 500 words or less, explain the implications for AutoEdge and its shareholders if there is a positive NPV or, conversely, if there is a negative NPV.”

“This will be interesting,” you say.

“Good,” he says. “Oh, and one more thing. In addition to considering the NPV value, we want to know what kind of economic assumptions you think the board should consider. Articulate the economic and political risks with the strategy, and list options to overcome them. How will this decision affect the share price and the value of the company? In light of all this information, would you support the option for expansion abroad or relocate back to the United States? Include an explanation of your response, as well.”

“I’ll get right on it,” you say.

Complete spreadsheet and 500 words for assignment

Year        Today    Time 1    Time 2    Time 3    Time 4    Time 5    Time 6
Cost of Capital            6%    6%    6%    6%    6%    6%

(US$ in millions)
Revenue            $30.10     $34.20     $38.10     $40.40     $45.60     $50.00
Selling, General, Admin            ($16.10)    ($17.20)    ($18.90)    ($19.50)    ($21.40)    ($24.30)
Depreciation            ($4.10)    ($4.40)    ($4.80)    ($4.90)    ($5.30)    ($5.70)
Interest Expense            ($0.45)    ($0.56)    ($0.69)    ($0.73)    ($0.78)    ($0.81)
Taxes            ($1.10)    ($1.30)    ($1.70)    ($1.90)    ($2.00)    ($2.10)

Change in fixed assets            ($1.30)    ($2.40)    ($0.90)    $0.00     ($4.90)    ($2.10)

Students need to calculate the following:

Net Income            $8.35
Depreciation added back            $4.10
Change in fixed assets            ($1.30)
Free Cash Flow            $11.15

Pvif factor            0.943    0.890    0.840    0.792    0.747    0.705
PV Cash flows            $10.51

Value of future flows
Initial expenditure        ($18.00)
NPV

The initial project was funded using an $18,000,000 bank loan carrying a 6% interest rate, i.e., the cost of capital.