The Museum of New Art traditionally offers a new exhibit each month, in addition to its permanent collection. Mary Moser, the new museum director, has found that the number of exhibits must be reduced because of financial constraints. The museum has always used a line-item budget, but Mary has asked for a program budget for each of the proposed exhibits for the coming year. Explain the difference between the line-item and program budget and why Mary wants the latter.
In the past year, a major factory closed in Parsons City. Following the closure, a number of residents moved from the town. Property values are falling and the mayor believes that a tax cut is necessary to avoid further exodus. He believes that the high unemployment rate will result in a substantially increased demand for some public services. On the other hand, the declining population may reduce demand for other services. What budget approach would make the most sense for the city for the coming year? Why?
What are several reasons that a financial manager says, “It depends,” rather than directly answering a question about how much something costs?
The city museum will have a Picasso exhibit on loan for 3 years. As part of the conditions of the loan, a specialized alarm and security system must be installed. High Security Company will install a suitable system for a $50,000 initial payment and $2,500 per month in monitoring fees. Tight Security Company will install a suitable system for a $75,000 initial payment and $1,675 per month in monitoring fees. Both security systems would be used for 3 years. Assuming an annual discount rate of 9 percent with monthly compounding, which contract has the lowest net present cost?
The town of Millbridge has just agreed to pay a pension to the town clerk. The pension will be $40,000 per year for the next 20 years. Dwight Ives, the town manager, has decided that the town should put aside enough money today to pay for the entire pension. He has argued that the town will not receive the clerk’s services in the future, so future taxpayers should not have to pay the pension. How much must be put aside, assuming the town earns 6 percent compounded annually? Does this funding approach make sense to you?
