BUS 640 WEEK 1
BUS 640 Managerial Economics
Week 1
DQ 1
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
DQ 2
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).
Week 1 Assignment
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?
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