1. The Shoe Club. Imelda is considering joining a shoe club. Once you join, you
ID: 1093191 • Letter: 1
Question
1. The Shoe Club. Imelda is considering joining a shoe club. Once you join, you must pay for eight years of membership. The initial membership is $7000. The annual fee is $3,000 for the first 4 years and $12,000 per year for the next 4 years. The shoe club will provide Imelda with a new pair of custom designer shoes every month. Imelda values custom designer shoes at $500 a pair. Her real discount rate is 18%. Should Imelda join the shoe club? 2. Extended Warranty. Chris is renting a house, and it does not have a refrigerator. A refrigerator is worth $2 every day because Chris will eat out less. Chris has a discount rate of 20%. Refrigerators usually last 5 years. a. Flow much is Chris willing to spend on a refrigerator? b. Lowe's is offering a financing deal with 10% downpayment and 6 years of payments every year of payments equals 20% of the purchase price. At these terms, how much is Chris willing to spend on the fridge. c. Chris buys a $1000 refrigerator on the finance plan. The refrigerator has a 3 year warranty. Chris can buy a 3 year extension of the warranty (making it an 6 year warranty) for $600. Assume the refrigerator will break when it is exactly five years old, and will not be repairable. The warranty will replace the broken refrigerator with a new unit. Should Chris buy the warranty? Assume the same Lowe's financing deal will be available in 5 years. 3. Paper Towels. Jimmie works for Procter & Gamble in Bounty brand management. US Bounty sales are $2 billion per year at a wholesale price of 52 a roll. Jimmie's market research says that if P&G; offers a 20% price reduction for the next six months, 25% more rolls will be sold for the next year. Each roll costs P&G; $1.00. The associated advertising campaign will cost $0.20 billion. P&G; has a discount rate of 1% per month. Figure this whole problem on a monthly basis instead of an annual basis. Should Jimmie reduce the price of Bounty?Explanation / Answer
value of shoes per year = 500 * 12 = 6000
cash advantage for years 1-4 = 6000 - 3000 = 3000
cash advantage ofr years 1-8 = 6000 - 12000 = -6000
NPV = -7000 + 3000/1.18 + 3000/1.18^2 + 3000/1.8^3 +3000/1.18^4 - 6000/1.8^5 - 6000/1.8^6 - 6000/1.8^7 - 6000/1.8^8
= -887.70
since NPV is negative , Imelda shouldnot join the shoe club
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.