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In order to celebrate your graduation you decide to throw a large party.  In order to finance the party you apply your ECN306 skills to run an espresso bar in the Memorial Union for the next 50 weeks.  The party is in 50 weeks so everything must be finished, equipment sold, etc. no more than 50 weeks hence.

Fortunately, the Memorial Union Board grants you exclusive rights to operate the espresso bar.  In other words, you can act like a profit maximizing monopolist.  Marketing surveys indicate the demand function for cups of espresso per week is:

Q = 1200 - 300P

The variable cost of producing a cup of espresso is $2.00. Labor and machinery are both independent of output (fixed cost).

There are two types of machines you can buy.  Each type has a different depreciation rate, a different labor requirement, and a different purchase price.

It will take you one week to set up shop after you purchase the machine.  The interest rate is 1% per week for both lending and borrowing.

Your job is to write a report that answers the following sets of questions: 

• What price will you charge per cup?  What quantity will you sell?  Compute the gross revenue, total costs, and profit per week.  You will probably have two answers—one for each machine.

• Compute the present value and future value (don't forget to sell the depreciated machine) for each type of machine installation.  Which machine will you purchase?

• Suppose the purchase price on the machine you decided not to buy is lowered.  At what price will it become competitive?

• Graph the present value of  both installations as a function of the interest rate.  Is there an interest  rate at which you would purchase the other machine?  What is the internal rate of return for both installations?  Which machine has the higher internal rate of return?  Is it the same machine you chose using present value?  Explain.