a)
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.
b)
To calculate: The IRR value using IRR function.
Time value of money (TVM):
It is a concept which states that the money available at a particular time will be worth more than the identical sum in future due to the potential earning capacity of the money. It is sometimes also referred to as the present discounted value.
c)
To verify: If the net present vaue is negative when the discount rate is somewhat greater than IRR, and that it is positive when the discount rate is somewhat lesser than IRR.
Time value of money (TVM):
It is a concept which states that the money available at a particular time will be worth more than the identical sum in future due to the potential earning capacity of the money. It is sometimes also referred to as the present discounted value.
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Practical Management Science, Loose-leaf Version
- Problem 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_forwardHemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D…arrow_forwardOption 2: Raise prices by 50%. If this occurs, there is a 75% chance that an Entrepreneur will set up in competition this year. The board’s estimate of its annual profit in this situation would be as follows: 2A: With new competitor 2B: Without new competitor Probability Profit (Sh.) Probability Profit (Sh.) 0.25 150,000 0.5 200,000 0.5 120,000 0.3 150,000 0.25 80,000 0.2 100,000 Option 3: Expand the car park quickly at a cost of Sh. 50,000 keeping prices theSame. The profits are then estimated to be like 2B above, except that the probabilities would be 0.6, 0.3 and 0.1 respectively. Required: Draw a decision tree for the above problem, including all the relevant data. Using expected values analyze the decision tree and recommend the best option to the owners of the car park.arrow_forward
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- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,