BUS 640 WEEK 1 COMPLETE WORK
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BUS 640 WEEK 1 COMPLETE WORK
Week 1 Economics of Risk and Uncertainty Applied Problems.
Please, complete the following 3 applied problems in a Word or
Excel document. Show all your calculations and explain your results. Submit
your assignment in the drop box by using the Assignment Submission button.
1. A generous university benefactor has agreed to donate a large
amount of money for student scholarships. The money can be provided in one
lump-sum of $10mln, or in parts, where $5.5mln can be provided in year 1, and
another $5.5mln can be provided in year 2. Assuming the opportunity interest
rate is 6%, what is the present value of the second alternative? Which of the
two alternatives should be chosen and why?
How would your decision change if the opportunity interest rate
was 12%? Please, show all your calculations.
2. Volkswagen is considering opening an Assembly Plant in
Chattanooga, Tennessee, for the production of its 2012 Passat, tailored for the
US market. The CEO of the company is considering two potential options for the
size of the plant: one is a large size with a projected annual production of
150,000 cars, and the other one is a smaller size plant, which is cheaper to
build, but can only produce up to 80,000 cars per year. Depending on the
expected level of demand for these cars in the US, Volkswagen has to decide
which option is more profitable. The discount rate is 6% and for simplicity
purposes, the CEO is only evaluating a two-year horizon. The initial factory
setup cost, the expected demand scenarios, profit, and probabilities are shows
in the below table. Calculate the Net Present Value in each of the two options.
Which option should the CEO choose and why? Please, show all your calculations.
3. An angel investor is considering investing in one of two
start-up businesses and is evaluating the expected returns along with the risk
of each option in order to choose the better alternative.
Business 1 is an innovative protein energy drink, which has ENPV
of $100,000 with a standard deviation of $40,000.
Business 2 is a unique chicken wings dipping sauce with an ENPV
of $60,000 and a standard deviation of $25,000.
a) Apply the coefficient-of-variation decision criterion to
these alternatives to find out which is preferred by the angel investor,
assuming that he/she is risk-averse.
b) Apply the maximin criterion, assuming that the worst outcome
in Business 1 is to lose $5,000, whereas the worst outcome in Business 2 is to
make only $5,000 in profit.
c) If you were the angel investor, what is your certainty
equivalent for these two projects? Are you risk-averse, risk-neutral, or
risk-lover?
Week 1 DQ1 Firm Objectives.
Why do some business firms pursue a triple-bottom-line outcome
while others focus only on profit maximization? Please, use a real company
example to illustrate your points
Week 1 DQ2 Decision Making Under Uncertainty.
To save on gasoline expenses, Edith and Mathew agreed to carpool
together for traveling to and from work. Edith preferred to travel on I-20
highway as it was usually the fastest, taking 25 minutes in the absence of
traffic delays. Mathew pointed out that traffic jams on the highway can lead to
long delays making the trip 45 minutes. He preferred to travel along Shea
Boulevard, which was longer (35 minutes), but rarely had traffic jams. Edith
agreed that in case of traffic jams, Shea Boulevard was a reasonable
alternative. Neither of them knows the state of the highway ahead of time.
After driving to work on the I-20 highway for 1 month (20
workdays), they found the highway to be jammed 3 times. Assuming that this
month is a good representation of all months ahead, should Edith and Mathew
continue to use the highway for traveling to work?
How would you conclusion change for the winter months, if bad
weather makes it likely for traffic jams on the highway to increase to 6 days
per month?
How would your conclusion change if Mathew purchased a new
smart-phone app that could show the status of the highway traffic prior to their
drive each morning, thus reducing the probability of them getting into a jam
down to only 1day per month (where on this day, the app showed no traffic jam,
but a jam developed in the meantime as they were driving along the highway).
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