Expert answer:Economics of Risk and Uncertainty Applied Problems
Answer & Explanation:Economics of Risk and Uncertainty Applied Problems****Grapgh would not post correctly but for each year besides year 0. Cash flow and probability goes under each and the last two columns fall under year 3 which it would not let me label. If you have any questions feel free to ask b4 bidding. Origianl work with each part labeled with plagiarism report attached!!!
Please complete the following two applied problems. Show all your calculations and explain your results.
Problem 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 $12 million in Year 0 (the current year), or in parts,
in which $7 million can be provided at the end of Year 1, and another $7
million can be provided at the end of Year 2.
Describe your answer for each item below in complete
sentences, whenever it is necessary. Show all of your calculations and
processes for the following points:
Assuming the opportunity interest rate is 8%, what is
the present value of the second alternative mentioned above? Which of
the two alternatives should be chosen and why?How would your decision change if the opportunity interest rate is 12%?Provide a description of a scenario where this kind of
decision between two types of payment streams applies in the
“real-world” business setting.
Problem 2:
The San Diego LLC is considering a three-year project, Project
A, involving an initial investment of $80 million and the following cash
inflows and probabilities:
Year 0 Year 1
year 2
Probability
Cash Flow
($ mil.)
Probability
Cash Flow
($mil.)
Probability
Cash Flow
($ mil.)
0.2
50
0.1
60
0.3
70
0.3
40
0.2
50
0.4
60
0.4
30
0.3
40
0.1
50
0.1
20
0.4
30
0.2
40
Initial Investment
$80 mil.
Discount Rate
8%
Describe your answer for each question in complete sentences,
whenever it is necessary. Show all of your calculations and processes
for the following points:
Describe and calculate Project A’s expected net present
value (ENPV) and standard deviation (SD), assuming the discount rate (or
risk-free interest rate) to be 8%. What is the decision rule in terms
of ENPV? What will be San Diego LLC’s decision regarding this project?
Describe your answer.The company is also considering another three-year
project, Project B, which has an ENPV of $32 million and standard
deviation of $10.5 million. Project A and B are mutually exclusive.
Which of the two projects would you prefer if you do not consider the
risk factor? Explain.Describe the coefficient of variation (CV) and the
standard deviation (SD) in connection with risk attitudes and decision
making. If you now also consider your risk-aversion attitude, as the CEO
of the San Diego LLC will you make a different decision between Project
A and Project B? Why or why not?
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