Activity Instructions

Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your newly acquired knowledge.

Scenario 1 (length: 0.5 – 1 page)

A pharmaceutical company has hired you to perform an economic analysis on a currently ongoing project. Experts from the company have estimated the market for the drug and thus the potential revenues for the drug are knows, but the relevant costs are becoming a sticking point for the company’s analysis.  The company initially provides you the following information:

  • The company has already spent $150,000 on research and development for the drug.  The first round of clinical trials has been performed cost $75,000 and the results from the trials were promising. 
  • The company is considering whether to proceed with the development of the product.  If the company continues the project, a second round of trials will be necessary. 
  • The company estimates that the cost of ingredients for the drug will cost $2 per dose, and 150,000 doses will be needed for the trial.
  • The company would also seek patent protection for the drug, which would cost an estimated $25,000 in filing fees.
  • When the drug goes into production, a new production line would need to be purchased at a cost of $240,000 and would last ten years, and the cost for the ingredients for the drug would fall to $1 per dose. 
  • Packaging and distribution would cost $0.50 per dose. 
  • The company also expects to spend $500,000 per year to advertise and promote the drug. 
  • The patent protection on the drug would last 17 years, at which time a generic version of this drug could be produced, at which time the company would cease production of this drug.
  1. Which costs are relevant when deciding whether to proceed with the project?
  2. Which costs are relevant when deciding how many doses of the drug to produce (assuming the drug makes it to production)? 
  3. Is there any other information for which you would need to ask the company to complete your analysis?

Scenario 2 (length: as needed)

An apple farmer has the following costs:

                                    Bushels                     Total Cost

                                         0                                  $200

                                       100                               $350

                                       200                               $550

                                       300                               $800

                                       400                             $1,300

                                       500                             $2,000

  1. What is the marginal cost per bushel of apples produced? 
  2. If the market price of a bushel of apples is $5.50, and is unaffected by the farmer’s production decision, then the marginal revenue of a bushel of apples is $5.50. In that case, how many bushels of apples should the farmer produce? 
  3. If the government imposes a tax on the sellers that results in the sellers receiving $1 less per bushel sold, what amount of apples should the farmer choose to produce?

Scenario 3 (length: 0.5 page)

A company selling widgets advertises through three types of media: print, television and internet. Recently the company has decided to increase its advertising budget by $100,000. In order to determine where the additional money should be spent, the company increased print advertising for a month by $5,000 and attracted 50 new customers. The following month, the print advertising was decreased back to its original level and television advertising was increased by $20,000 and attracted 175 new customers. In the third month, television advertising was decreased to its original level and internet advertising was increased by $2,500 and attracted 30 new customers. 

  1. Given this data, what can you say about where the $100,000 increase should go? 
  2. How would you check to determine if you made the correct decision?

Scenario 4 (length: as needed)

Suppose a company has a WACC of 10% and is considering a project that initially costs $40,000 and will return $15,000 after the first year, $20,000 after the second year and $10,000 after the third year.  There are no additional returns or costs for this project.

  1. What is the NPV of this project? 
  2. Should the company undertake the project?

Writing Requirements

  • Length: as indicated (Show your calculations where appropriate.)

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