Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
expand_more
expand_more
format_list_bulleted
Question
Chapter 2.7, Problem 16P
Summary Introduction
To calculate: The
Time value of money (TVM):
It is an idea which states that the money existing at a particular time will be worth more than the matching sum in future due to the prospective earning capacity of the money. It is sometimes also referred to as the present discounted value.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the “shell” will cost $152,500 and is expected to have a $50,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $16,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $9,000 per year. If the company’s MARR is 13% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options.
The future worth when purchased is $
The future worth when leased is $
Mono Industries has a project with the following projected cash flows:
Initial Cost, Year 0: P200,000
Cash flow year one: P25,000
Cash flow year two: P75,000
Cash flow year three: P150,000
Cash flow year four: P150,000
Using a 10% discount rate for this project and the NPV model, should this project
be accepted or rejected?
A farmer in Georgia must decide which crop to plant next year on his land: corn, peanuts, or soybeans. The return from each crop will be determined by whether a new trade bill with Russia passes the Senate. The profit the farmer will realize from each crop, given the two possible results on the trade bill, is shown in the following payoff table: Trade Bill Crop Pass Fail Corn $35,000 $ 8,000 Peanuts 18,000 12,000 Soybeans 22,000 20,000 Determine the best crop to plant, using the following decision criteria. a. Maximax b. Maximin c. Minimax regret d. Hurwicz e. Equal likelihood
Chapter 2 Solutions
Practical Management Science
Ch. 2.4 - Prob. 1PCh. 2.4 - Prob. 2PCh. 2.4 - Prob. 3PCh. 2.4 - Prob. 4PCh. 2.5 - Prob. 5PCh. 2.5 - Prob. 6PCh. 2.5 - Prob. 7PCh. 2.5 - Prob. 8PCh. 2.5 - Prob. 9PCh. 2.6 - Prob. 10P
Ch. 2.6 - Prob. 11PCh. 2.6 - Prob. 12PCh. 2.6 - Prob. 13PCh. 2.7 - Prob. 14PCh. 2.7 - Prob. 15PCh. 2.7 - Prob. 16PCh. 2.7 - Prob. 17PCh. 2.7 - Prob. 18PCh. 2.7 - Prob. 19PCh. 2 - Julie James is opening a lemonade stand. She...Ch. 2 - Prob. 21PCh. 2 - Prob. 22PCh. 2 - Prob. 23PCh. 2 - Prob. 24PCh. 2 - Prob. 25PCh. 2 - The file P02_26.xlsx lists sales (in millions of...Ch. 2 - Prob. 27PCh. 2 - The file P02_28.xlsx gives the annual sales for...Ch. 2 - Prob. 29PCh. 2 - A company manufacturers a product in the United...Ch. 2 - Prob. 31PCh. 2 - Prob. 32PCh. 2 - Assume the demand for a companys drug Wozac during...Ch. 2 - Prob. 34PCh. 2 - Prob. 35PCh. 2 - Prob. 36PCh. 2 - Prob. 37PCh. 2 - Suppose you are borrowing 25,000 and making...Ch. 2 - You are thinking of starting Peaco, which will...Ch. 2 - Prob. 40PCh. 2 - The file P02_41.xlsx contains the cumulative...Ch. 2 - Prob. 42PCh. 2 - Prob. 43PCh. 2 - The IRR is the discount rate r that makes a...Ch. 2 - A project does not necessarily have a unique IRR....Ch. 2 - Prob. 46PCh. 2 - Prob. 1CCh. 2 - The eTech Company is a fairly recent entry in the...
Knowledge Booster
Similar questions
- Given the following payoff table with the profits ($m), a firm might expect alternative investments (A, B, C) under different levels of interest rate. (Attached)(a) Which alternative should the firm choose under the maximax criterion? (b) Which option should the firm choose under the maximin criterion? (c) Which option should the firm choose under the LaPlace criterion? (d) Which option should the firm choose with the Hurwicz criterion with α = 0.2? (e) Using a minimax regret approach, what alternative should the firm choose? (f) Economists have assigned probabilities of 0.35, 0.3, and 0.35 to the possible interest levels 1, 2, and 3 respectively. Using expected monetary values, what option should be chosen and what is that optimal expected value? (g) What is the most that the firm should be willing to pay for additional information? Use Expected Regret (h) Use the alternative method to verify EVPI Part 2 Assume now that the pay offs are costs answer the following: (a) Using an…arrow_forwardAn investor has a certain amount of money available to invest now. Three alternative investments are available. The estimated profits, in Kwacha, of each investment under each economic condition are indicated in the following payoff table: Event Investment selection A B C Economy declines 500 -2000 -7000 No charge 1000 2000 -1000 Economy Expand 2000 5000 20,000 Based on his own past experience, the investor assigns the following probabilities to each economic condition: P (Economy declines) = 0.30 P (No Change) = 0.50 P (Economy expands) = 0.20 i. Compute the coefficient of variation for each investment. ii. Compute the return-to-risk ratio (RTRR) for each investment. iii. Based on (i) and (ii), what investment would you choose? Why?arrow_forwardA store owner must decide whether to build a small or a large facility at a new location. Demand at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6, respectively. If small facility is built and demand proves to be high, the manager may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is P220,000. If a large facility is built and demand proves to be low, the choice is to do nothing (P60,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is P900,000.a.) Draw a decision tree.b.) Determine the expected payoff for each decision and event node.c.)…arrow_forward
- A manager wants to expand summer resort facilities now or wait at least another year. If he expands now and the upcoming summer season is good, the profit will be K246 000; and if not good, the loss will be K60 000. If he delays the expansion for at least a year and the upcoming summer season is good, the profit will be K120 000; if the season is poor, the profit will be K12 000. Required: Assuming the probability of a good summer in both cases is 1/3, use Bayesian analysis to aid the manager.arrow_forwardProblem 1: A government committee is considering the economic benefits of a program of preventative flu vaccinations. We will assume that the flu vaccine is completely effective so if the vaccine is implemented, there will be no flu cases. It is estimated that a vaccination program will cost $9 million and that the probability of flu striking in the next year is 0.70. If vaccinations are not introduced then the estimated cost to the government if flu strikes in the next year is $7 million with probability 0.15, $10 million with probability 0.25 and $15 million with probability 0.6. One alternative open to the committee is to institute an "early-warning" monitoring scheme (costing $3 million) which will enable it to detect an outbreak of flu early and therefore decide whether or not to institute a rush vaccination program (costing $12 million because of the need to vaccinate quickly before the outbreak spreads, again with the vaccine being completely effective) or to do nothing with…arrow_forwardEllie Daniels has $200,000 and is considering three mutual funds for investment—a global fund, an index fund, and an Internet stock fund. During the first year of investment, Ellie estimates that there is a .70 probability that the market will go up and a .30 probability that the market will go down. Following are the returns on her $200,000 investment at the end of the year under each market condition: Market Conditions Fund Up Down Global $25,000 $ -8,000 Index 35,000 5,000 Internet 60,000 -35,000 At the end of the first year, Ellie will either reinvest the entire amount plus the return or sell and take the profit or loss. If she reinvests, she estimates that there is a .60 probability the market will go up and a .40 probability the market will go down. If Ellie reinvests in the global fund after it has gone up, her return on her initial $200,000 investment plus her $25,000 return after 1 year will be $45,000. If the market goes down, her loss will be $15,000. If she reinvests after…arrow_forward
- Consider a firm run by an “incumbent” manager. Suppose the incumbent manager has the opportunity to invest in one of two different projects, Project 1 or Project 2. The incumbent manager has a higher ability in managing Project 1 rather than Project 2. Also, if theincumbent is fired by shareholders, she is replaced by an “alternative” manager whose ability to manage Project 1 is lower than the incumbent’s ability. Suppose the investment in a project is irreversible, and the shareholders’ choice of the incumbent manager salary (as well as their decision on whether to fire her) is taken afterthe investment is made. Also, assume the incumbent manager has a stake in the firm she runs, but she does not fully control it. Questions:(a) Suppose none of the projects gives the manager a direct utility. According to Shleifer and Vishny (1989), which of the two projects should the incumbent manager choose? What is the economic rationale behind this choice? Explain. (b) Suppose the incumbent…arrow_forwardTroop Inc. is considering building a factory in India. The estimated cash flows for the project are given below and management consider that a discount rate of 12% reflects the riskiness of the venture. The Indian government has agreed to purchase the factory at the end of three years operation for Rupees 250 million. Year 0 Year 1 Year 2 Year 3 Total cash inflows (Indian rupees (m)) 0 300 500 600 Total cash outflows (Indian rupees (m)) 800 220 230 280 Increase in US cash inflows (m) 0 2 2 2 Forecast exchange rate Rupees /$ 78.7 78.9 80 80.5 Required:a) Calculate the net present value of the project and advise whether Troop Inc should build the factory. b) Describe the factors Troop Inc. should consider when…arrow_forwardA retailer must decide whether to build a small or a large facility at a new location. Demand at the location can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small facility is built and demand proves to be high, the manager may choose not to expand (payoff = $223,000) or to expand (payoff = $270,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is $200,000. If a large facility is built and demand proves to be low, the choice is to do nothing ($40,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff is estimated to be only $20,000; the payoff grows to $220,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is $800,000.Draw a decision tree. Then analyze it to determine the…arrow_forward
- A television station may either extend a current television show for another season or develop a completely new show for that time slot. It will cost $6M to develop the new show. The new show may be very successful, moderately successful, or not successful with associated advertising revenues of $25M, $15M, or $5M, respectively. If the station chooses to extend the current show, it will cost $2M. The extended show may be very successful, moderately successful, or not successful with associated advertising revenues of $15M, $10M, or $5M, respectively. Which of the following are true? A. There are a total of six branches in the entire decision tree. B. There are eight leaves or terminal nodes in the entire decision tree. C. There is one event node in the decision tree. D. None of the abovearrow_forwardAssume that Trinbago is a small country that produces wine and motor vehicles, where motorvehicles are capital intensive. Trinbago is also capital intensive, and the standard Heckscher -Ohlin(H-O) assumptions hold. The other country in the model is Vincyland Given that Vincyland is a small country, examine the partial equilibrium welfare effectsassociated with imposing a tariff on their import good given that the prediction of theimported good yields a positive externality.Should a subsidy have given a moredesirable solution.arrow_forwardManagement of AG Travel and Tour has identified two groups of individuals that would be interested in the vacation package consisting of room and board and/or entertainment. The maximum amount that group 1 is willing to pay for room and board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum amount they are willing to pay for room and board is GHC 1800 and for entertainment is GHC 750. Although AG Travel and Tour is not able to identify members of either group, it does know that each group values the components of the package differently. Assuming there are an equal number of members in each group and that the total membership in each group is a single individual. If the marginal cost of providing the service (room and board and/or entertainment) to each group is GHC 1000. What will be the profit for AG Travel and Tour in the case of (iii) above?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,
Practical Management Science
Operations Management
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:Cengage,