# Honda Motor Company Case Study

**Question description**

Honda Motor Company is considering offering a $3,000 rebate on its minivan, lowering the vehicle’s price from $32,000 to $29,000. The marketing group estimates that this rebate will increase sales over the next year from $42,000 to $58,000 vehicles. Honda’s profit margin with the rebate is $4,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs? Is it a good idea

**The benefits are $29.4 million. (round to 1 decimal)**

Profit if (a) Honda had not given the rebate, it would have earned a profit of $7000 per minivan. Sales= 42,000--------- Hence total profit= 42000 x 7000 =29.4 million

. With the rebate, its sales increase but profit decreases

Here profit= 4000PER VEHICLE X 16,000 ADDITIONAL VEHICLE SOLD= 64.0 MILLION

THE COSTS ARE$_________. MILLION. ( ROUND TO ONE DECIMAL PLACE.)

2. Suppose the current market price of corn is $4.48 per bushel, your firm has a technology that can convert, 1 bushel of corn 3 gallon of ethanol. If the cost of conversion is $ 1.71 per bushel, at what market price of ethanol does conversion become attractive?

**The price at which the con version becomes attractive is$
____________ per gallon. (round to nearest cent.). The breakeven point is $
______ /gallon of ethanol. Beyond that anything is acceptable to make a profit**

3. Suppose the risk-free interest rate is 4%

A. Having $200 today is equivalent to having what amount in one year?

It is equivalent to having $_______________ in one year.(round to the nearest cent.)

**5. Your firm has identified three potential investment
projects. The project and their cash flows are shown below:**

Project Cash Flow Today Millions Cash Flow in One Year Million

A. -$15.00 $15.00

B. $2.00 $2.00

C. $15.00 -$15.00

Supposed all cash flow are certain and the risk-free, interest rate is 5%.

A. What is the NPA of each project?

The NPV of project A *is$**______ *** million**. (round to 2 decimal places)

6. What is the present value of $8,000 received

A. 14 years from today when the interest rate is 10% per year.=

B. 23 years from today when the interest rate is 12% per year?=

c. 7 years from today when the interest rate 5% per year?=

a. The present value is $___________. (round to the nearest dollar.)

First Year _________A

Second Year ______B

Third Year =_______C

8. Suppose you receive $100 at the end of each year for the next three years

A. If the interest rate is 8%, what is the present value of these cash flows?

The present value of these cash flows is $ ____________(round to the nearest cent.)

9. You have just received a windfall from an
investment you made in a friend’s business. He will be paying you $11,000 at
the end of this year, $22,000 at the end of the following years, and $33,000 at
the end of the year. After that (three years from today). The interest rate is
6.0% per year**(round to the nearest
dollars.)**

A. What is the present value of your windfall?_______.** (round to the nearest dollars.)**

**Here is the
cash flow timeline for part(a):**

**Year ) 0 1 2 3**

**Cash Flow
PV=? 11,00 22,000
33,000**

**The present
value of your windfall is $____________.(round to the nearesr dollar.)**

**The present
value of your windfall is found by using this formula:**

** C1
+C2 +C3**

**PV=**

** (1+r)+ (1+r)2+(1+r)3**

**B. What is the
future value of your windfall in three years(round to the date of the last
payment)?**

**The future
value of your windfall in three years is $_______.(round to the nearest
dollar.)**

**Here is the
cash flow timeline for part (b):**

** 0 1 2 3**

**Years **

**Cash Flow 11,000 22,000 33,000**

**
FV=?**

**The future
value value of your windfall in three years is $_________.(round to the nearest
dollar.) **

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