Question description

Economics of Risk and Uncertainty Applied Problems****If you have any questions feel free to

ask b4 bidding. Original work with each part labeled with plagiarism

report attached!!!Graph has been attached for problem #2!!!!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: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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