Practice Problem Set 01

Section A (MCQ/ True-False)

(Answer all questions)

1. Florean Fortescue’s Ice-cream Parlour expects its new line of specialty peanut butter ice-
cream to start generating $80,000 in annual profit beginning one year from now. This level
of annual profit will continue for the succeeding five years. Bringing the product line on
stream will require an up-front investment of $250,000. Which of the following Excel
formula should Florean Fortescue’s Ice-cream Parlour use to determine if it should invest
in this new line of specialty peanut butter ice-creams? Assume the rate to be 15%.
a. =NPV(15%,-250000,80000,80000,80000,80000,80000)
b. =-250000 + NPV(15%,80000,80000,80000,80000,80000)
c. =250000 + NPV(15%,80000,80000,80000,80000,80000)
d. =NPV(15%,250000,80000,80000,80000,80000,80000)
e. None of the alternatives

2. You have located a two-year investment that pays 10% per year. You invest $400 today.
Which of the following Excel formulae should you use to calculate how much you will
have at the end of the five years?
A) =FV(10%,5,0,-400)
B) =FV(10%,5,-400,0)
C) =PV(10%,5,0,-400)
D) =FV(10%,5,0,-400,0)

a. A
b. B
c. C
d. D
e. Both A and D are correct
f. None of the alternatives

3. Stuart has recently resigned from his job at The Comic Book Store to pursue his dream to
be an artist. To pay the fees for art school, he is borrowing $15,000 from his friend Sheldon
Cooper and hopes to pay him back over the next 5 years. Sheldon said he is going to charge
an annual interest rate of 8 percent. Which of the following formulae must be used to
compute the monthly payment that Stuart has to make?
a. =FV(0.08/12,5*12,0,15000,0)
b. =PMT(0.08,5,15000,0,0)
c. =PMT(0.08/12,5*12,15000,0,0)
d. =PMT(0.08/12,5*12,15000,0,1)
e. None of the alternatives

4. Consider a project having the following cash flows shown below. Assuming a 10% rate,
which of the following formulae would you write to calculate the NPV?
Year 1 Year 2 Year 3
-$80000 $10000 $15000
 a. = NPV(10%,-$80000,$10000,$15000)
b. = NPV(10%,$10000,$15000)-$80000
c. = NPV(10%,$10000,$15000)+$80000
d. None of the alternatives

5. We are given an optimization problem where we want to minimize cost. While solving
this problem in Excel, we need to input the cell reference for the outcome in the Solver
dialogue box as:
a. Objective
b. Changing Variable Cells
c. Constraints
d. Solving Method
e. None of the alternatives

6. Modularization and parameterization help keep models simple. True or False?

a. True
b. False

7. Parameterization is required for effective sensitivity analysis. True or False?

a. True
b. False

8. Making formulae short has no effect on the possibility of errors in a spreadsheet modeling
exercise. True or False?
a. True
b. False

9. Using a scenario manager, we can observe the effect of the change:

a. of only one input variable on one or more than outcome variable(s)
b. of only two input variables on one outcome variable
c. of multiple input variables on multiple outcome variables
d. none of the alternatives

10. Missy Cooper has just won a lottery. At the end of each of the next 25 years, she will
receive a payment of $50,000. If the rate is 12 percent per year, which of the following
Excel functions should she use to calculate the present value of her lottery winnings?
a. =FV(0.12,25,-50000,0,0)
b. =PV(0.12,25,50000,0,0)
c. =PV(0.12,25,0,50000,0)
d. None of the alternatives
 Section B (Modeling Problems)
(Answer Any Two)

1. Amalgamated Hat Rack

Amalgamated Hat Rack is launching its new line of coat racks. Its cash investments for this launch
is $1,50,000 today, $75,000 one year from now and finally $25,000 two years from now. The cash
flow from operations are given in the table below. In addition, Amalgamated plans to sell the
product line at the end of five years for $1,70,000.
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Flow -$15,000 $40,000 $80,000 $90,000 $100,000
from
Operations

a. Assuming a rate of 10%, should Amalgamated Hat Rack launch the new line of coat racks?
b. What is the effect of the following scenarios on the launch of the product line?
Scenarios Rate Today’s investment
Best case 10% $1,00,000
Likely case 12% $1,50,000
Worst case 15% $2,00,000

2. Potato Farm
Alice and Bob own a potato farm and are planning the mix of different types of potatoes to plant
on their 120-acre farm for the upcoming season. The table below gives the labour-hours and
fertilizer required per acre and the total expected profit per acre for each of the potential potato
crops under consideration. Alice and Bob can work at most 6500 total hours during the upcoming
season. They have 200 tons of fertilizer available.
Potato type Labour required Fertilizer required Expected profit (per
(hours/acre) (tons/acre) acre)
Yukon Gold 50 1.5 $500
Vitelotte 60 2 $600
King Edward 105 4 $950
a. What mix of potatoes should be planted to maximize their profit? Use your knowledge of
spreadsheet modelling to help Alice and Bob.
b. What are the constraints in this case?

3. Weasleys’ Magic Potion

George and Fred Weasley want to open a stall at the Diagon Alley to sell the Muffling Draught
potion and are trying to decide what price to charge for each glass of the same. The fixed cost
associated with starting the stall is 45,000 wizard dollars. They have estimated that the unit cost is
0.45 wizard dollar for the draught. Before opening the stall, they are curious about how their profit,
revenue and variable costs will depend on the price they charge and the unit cost. Annual demand
for Muffling Draught can be computed using the formula 65000 -9000*price.
 a. Develop a spreadsheet model to help George and Fred. You can use the base case price of
$4.00.
b. How does profit vary with unit price and unit cost? You can vary the unit price from 1.00
to 4.00 wizard dollars (e.g., in steps of 25 wizard cents) and the unit cost from 0.30 to 0.60
wizard dollars (e.g., in steps of 5 wizard cents).
c. Find out the breakeven unit price. Which Excel feature will you use to find this?

4. Madam Malkin’s Robes

Madam Malkin manufactures three types of robes for wizards: Disappearing Robes, Beautifying
Robes, and Self-ironing Robes. Demand for robes is unlimited and 40 hours per week of machine
time and labor are available. The profit from each type of robe and the number of minutes of
machine time and labor used for each type of robe are given in the table below.
Robe Types Disappearing Robe Beautifying Robe Self-ironing Robe
Profit $40 $25 $30
Minutes labor used 40 20 30
Minutes machine time 45 25 26
used

a. Create a spreadsheet model to help Madam Malkin maximize her profit by deciding on how
many of each type of robe to manufacture.
b. What is/are the constraint(s) in this case?