1. Week 3 Assignment 1
ECO 550 – Fall 2016
Assignment 1: Demand Estimation
Due Week 3 and worth 200 points
Imagine that you work for the maker of a leading brand of low-
calorie, frozen microwavable food that estimates the following
demand equation for its product using data from 26
supermarkets around the country for the month of April.
Note: The following is a regression equation. Standard errors
are in parentheses.
QD = -3,750 - 100P + 25A + 50PX + 8Y
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.90 n = 26 F = 35.25
Your supervisor has asked you to compute the elasticities for
each independent variable. Assume the following values for the
independent variables:
QD = Quantity demanded of a unit
(dependent variable)
P (in cents) = 300 cents per unit (price per unit)
PX (in cents) = 200 cents per unit (price of leading
competitor’s product)
Y (in dollars) = $10,000 (per capita income in the
Standard Metropolitan Statistical Area (SMSA) where the 26
supermarkets are located)
A (in dollars) = $750 (monthly advertising
expenditures)
Write a four to six (4-6) page paper in which you:
1. Compute the elasticities for each independent variable. Note:
Write down all of your calculations.
2. Determine the implications for each of the computed
elasticities for the business in terms of short-term and long-term
pricing strategies. Provide a rationale in which you cite your

2. results.
3. Recommend whether you believe that this firm should or
should not cut its price to increase its market share. Provide
support for your recommendation.
4. Assume that all the factors affecting demand in this model
remain the same, but that the price has changed. Further assume
that the prices are 100, 200, 300, 400, 500, 600, 700, and 800
cents.
·
. Plot the demand curve for the firm.
. Plot the supply curve ( QS= -7909.89 + 79.0989 P ) using the
same prices 100, 200, 300, 400, 500, 600, 700, and 800 cents.
5. Determine the equilibrium price and quantity. (Show this
graphically and/or calculate using algebra.)
6. What short-term and long-term changes in market conditions
could shift the demand and supply curves for this product?
7. Use at least three (3) quality academic resources in this
assignment. Note: Wikipedia does not qualify as an academic
resource.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size
12), with one-inch margins on all sides; citations and references
must follow APA or school-specific format. Check with your
professor for any additional instructions.
· Include a cover page containing the title of the assignment, the
student’s name, the professor’s name, the course title, and the
date. The cover page and the reference page are not included in
the required assignment page length.
BBA 3310 Unit VII Assignment
Instructions: Enter all answers directly in this worksheet. When
finished select Save As, and save this document using your last
name and student ID as the file name. Upload the data sheet to

3. Blackboard as a .doc, .docx or .rtf file when you are finished.
Question 1: (10 points). (Net present value calculation) Dowling
Sportswear is considering building a new factory to produce
aluminum baseball bats. This project would require an initial
cash outlay of $4,000,000 and would generate annual net cash
inflows of $900,000 per year for 7 years. Calculate the project's
NPV using a discount rate of 5 percent. (Round to the nearest
dollar.)
a. If the discount rate is 5 percent, then the project's NPV is:
Question 2: (30 points). (Net present value calculation) Big
Steve's, makers of swizzle sticks, is considering the purchase of
a new plastic stamping machine. This investment requires an
initial outlay of $90,000 and will generate net cash inflows of
$19,000 per year for 11 years. To answer Choose an item
questions, click on the orange text and use the pull down menu
to select the best answer.
a. What is the project's NPV using a discount rate of 7 percent?
(Round to the nearest dollar.)
If the discount rate is 7 percent, then the project's NPV is:
Should the project be accepted? Yes it adds value to the firm
The project should be accepted because the NPV is positive and
therefore adds value to the firm.
b. What is the project's NPV using a discount rate of 16
percent?

4. If the discount rate is 16 percent, then the project's NPV is:
Should the project be accepted? Why or why not? The project
should be accepted because the NPV is positive and therefore
adds value to the firm.
c. What is this project's internal rate of return? (Round to two
decimal places.)
This project's internal rate of return is:
Should the project be accepted? Why or why not?
If the project's required discount rate is 7%, then the project
should be accepted because the IRR is higher than the required
discount rate.
If the project's required discount rate is 16%, then the project
should be accepted because the IRR is higher than the required
discount rate.
Question 3: (15 points). (Related to Checkpoint 11.2)
(Equivalent annual cost calculation) Barry Boswell is a
financial analyst for Dossman Metal Works, Inc. and he is
analyzing two alternative configurations for the firm's new
plasma cutter shop. The two alternatives that are denoted A and
B below perform the same task and although they each cost to
purchase and install they offer very different cash flows.
Alternative A has a useful life of 7 years whereas Alternative B
will only last for 3 years. The after-tax cash flows from the two
projects are as follows:

5. a. Calculate each project's equivalent annual cost (EAC) given a
discount rate of 10 percent. (Round to the nearest cent.)
a. Alternative A's equivalent annual cost (EAC) at a discount
rate of 10% is:
b. Alternative B's equivalent annual cost (EAC) at a discount
rate of 10% is
b. Which of the alternatives do you think Barry should select?
Why? (Select the best choice below.)
a. This cannot be determined from the information provided.
b. Alternative B should be selected because its equivalent
annual cost is less per year than the annual equivalent cost for
Alternative A.
c. Alternative A should be selected because its equivalent
annual cost is less per year than the annual equivalent cost for
Alternative B.
d. Alternative A should be selected because it has the highest
NPV.
Answer:
Question 4: (10 points). (IRR calculation) What is the internal
rate of return for the following project: An initial outlay of
$9,000 resulting in a single cash inflow of $15,424 in 7 years.
(Round to the nearest whole percent.)
a. The internal rate of return for the project is:

6. Question 5: (10 points). (IRR calculation) Jella Cosmetics is
considering a project that costs $750,000 and is expected to last
for 9 years and produce future cash flows of $180,000 per year.
If the appropriate discount rate for this project is 17 percent,
what is the project's IRR? (Round to two decimal places.)
a. The project's IRR is:
Question 6: (10 points) (IRR, payback, and calculating a
missing cash flow) Mode Publishing is considering a new
printing facility that will involve a large initial outlay and then
result in a series of positive cash flows for four years. The
estimated cash flows associated with this project are:
If you know that the project has a regular payback of 2.9 years,
what is the project's internal rate of return?
a. The IRR of the project is:
Question 7: (15 points) (Mutually exclusive projects and NPV)
You have been assigned the task of evaluating two mutually
exclusive projects with the following projected cash flows:
If the appropriate discount rate on these projects is 11 percent,
which would be chosen and why? (Round to the nearest cent.)
a. The NPV of Project A is:
b. The NPV of Project B is:

7. Which project would be chosen and why? (Select the best
choice below.)
a. Cannor choose without comparing their IRRs.
b. Choose A because its NPV is higher.
c. Choose both because they both have positive NPVs.
d. Choose B because its NPV is higher.
Answer: