Susan Crossing purchased a used Ford Focus for $8,000. Since purchasing the car, she has spent the following amounts on parts and labor:

New stereo system $1,500
New paint job 2,500
New tires 900
New muffler 250
Total $5,150

Unfortunately, the car needs a few major repairs now; among other things, the brake rotors and pads must be replaced, and the radiator has sprung a leak. (A new radiator is needed.) The repairs are estimated to cost $2,500.

Susan has looked around at other used cars and has found a used Honda Civic for $8,500 that is in very good condition and is approximately the same age as the Ford Focus. Susan can sell the Ford Focus "as is" for $6,500.

In trying to decide whether to repair the Ford Focus or buy the Honda Civic, Susan is upset because she has already spent $13,150 on the Focus. The car seems like it costs too much to sell at such a large loss. How would you react to her dilemma?

Assuming that Susan would be equally happy with either the Ford Focus or the Honda Civic, should she buy the Civic or repair the Focus? Explain your answer.

Primary Savings and Loan of Denver is conducting an ABM study of its teller operations. In this regard, the company has identified the following major activities performed by bank tellers:

Process deposits
Process withdrawals
Process requests for certificates of deposit
Answer customer questions related to balances, overdrafts, interest rates, etc.
Print out customer activity statements
Provide access to safe deposit boxes
Reconcile cash drawer
The company benchmarked its operations against banks in other cities and has found that it has many more tellers in comparison to banks of similar size. Further, the company has a relatively unsophisticated Web site and call center.

1. How do the company's Web site and call center affect the demand for teller activities and the cost of teller services?

2. Identify two or three ways that technology can be used to reduce the cost of teller services.

AE9-12

Cash Flow Implications of Tax Losses [LO 4]

WesternGear.com is expected to have operating losses of $200,000 in its first year of business and $250,000 in its second year. However, the company expects to have income before taxes of $250,000 in its third year and $375,000 in its fourth year. The company's required rate of return is 14 percent.

Assume a tax rate of 40 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2?