Honda Motor Company Case Study

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.)