CE 206 Final Exam

• Profit = Revenue - Costs
• Revenue = (Q) * (S)
• Breakeven:

  When the profit = 0, or when the Revenue and Cost are the same
• Fixed Cost: Constant regardless of the level of output
• Variable Costs: Costs that can be directly associated with each unit of output
• Variable Cost Examples:

  Labor

  Energy

  Shipping

  Materials
• Marginal cost: Variable cost associated with producing 1 additional unit
• Average Cost: (Total cost) / (Number of Outputs)
• Overhead: Associated with the broader business
• Average Cost Example:

  Find the average cost for 300 attendees

  Total Cost = $1000 + 300($10/meal) = $4000

  Average Cost = $4000/300 = $13.33
• Marginal Cost Example

  Find the Marginal Cost for the 300th and 301st person

  If we have 300 attendees

  Total Cost = $1000 + 300($10/meal)

  Marginal Cost of the 300th person = $10

  Marginal Cost of the 301st person = $1010
• Sunk Costs are the result of a past decision

  They should not affect decisions going forward
• Opportunity Cost: The benefit forgone by using a resource in one way rather than another
• Average and Marginal Cost Example:

  1-8 credits = $3000/credit

  9-21 credits = $25000 total

  What is the Average Cost for the 9th credit?

  Average Cost = $25000 / 9 = $2777/credit

  Marginal Cost of 9th credit

  8 credits = $24000

  9 credits = $25000

  Then the marginal cost of the 9th credit is $1000
• Interest is rent paid for using someone else's money for a time.
• Money has a relationship with time that has two aspects:

  Opportunity and Risk
• When using interest, never use Nominal only use Effective
• Simple Interest is computed only on the original sum of Principal, P
• Compound Interest is computed on the original sum, P plus interest that has accrued
• Opportunity Cost Example:

  Having an internship that pays you $3000 for 2 months, but instead of working you would go on a trip to Europe that costs $3000 for 2 months

  The total Opportunity Cost will be = $6000
• Market Consequences:

  Benefits of costs whose magnitude is really established by the market
• Intangible Consequences:

  Consequences with a weak economic dimension
• Equivalence is dependent on interest rates
• Cost of Capital Concept:

  • Use an MARR equal to the rate the funding agency can borrow money at, through bond issues.
• Government Opportunity Cost Concept:

  • Set the MARR equal to the ROR of the best pending project for which funding is currently unavailable
• Taxpayer Opportunity Cost Concept:

  • Set the MARR equal to the average ROR a typical taxpayer could make
• Use the largest of the, Cost of Capital, Government Opportunity, and Taxpayer Opportunity Concepts
• OMB = Office Management Budget
• Non Partisan Federal Agency

  • Recommends using 7.5% APY for federally funded projects
• Mutually Exclusive = Choosing one alternative
• NPW and EUAW Analysis is VERY similar
• Alternatives with an infinite amount use the equation -> P = (A/i)
• Amortization Schedule gives all the details about how a loan will be repaid.
• ROR > MARR = attractive
• ROR Analysis is the most widely used and misused technique in the financial industry to make economic decisions
• The alternative with the highest ROR or B/C is NOT always the best
• Falling home prices increase the equity of the homeowner. T/F

  • False
• ROR < MARR = unattractive
• Bond prices fall with increasing interest rates
• Example of Liquidity

  • If a firm is short on working capital