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Economics of Risk and Uncertainty Applied Problem
Jessica Shrewsbury
BUS640 Managerial Accounting Instructor Choi
February 23, 2015

Economics of Risk and Uncertainty Applied Problem
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:
a. Assuming the opportunity interest rate is 8%, what is the …show more content…

Year 0
Year 1
Year 2
Year 3

Cost
($ mil)
Demand probability Profit PV
(DF = 0.926)
Demand probability Profit PV
(DF = 0.857)
Demand probability Profit PV
(DF = 0.794) NPV of Profit ($)
Joint probability ENPV of branches ($)

0.2 $ 50.0 $ 46.3
0.1
$ 60.0 $ 51.4
0.3
$ 70.0 $ 55.6 $ 73.3
0.006
$ 0.44

0.2 $ 50.0 $ 46.3
0.2
$ 50.0 $ 42.9
0.4
$ 60.0 $ 47.6 $ 56.8
0.016
$ 0.91
0.9259259
0.2 $ 50.0 $ 46.3
0.3
$ 40.0 $ 34.3
0.1
$ 50.0 $ 39.7 $ 40.3
0.006
$ 0.24

0.2 $ 50.0 $ 46.3
0.4
$ 30.0 $ 25.7
0.2
$ 40.0 $ 31.8 $ 23.8
0.016
$ 0.38
0.8573388
0.3 $ 40.0 $ 37.0
0.1
$ 60.0 $ 51.4
0.3
$ 70.0 $ 55.6 $ 64.0
0.009
$ 0.58

0.3 $ 40.0 $ 37.0
0.2
$ 50.0 $ 42.9
0.4
$ 60.0 $ 47.6 $ 47.5
0.024
$ 1.14
0.7938322
0.3 $ 40.0 $ 37.0
0.3
$ 40.0 $ 34.3
0.1
$ 50.0 $ 39.7 $ 31.0
0.009
$ 0.28
-80

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