Economics of Risk and Uncertainty Applied Problem
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?
Carefully review the
Grading Rubric
for the criteria that will be used to evaluate your assignment.
Description
:
Total Possible Score
: 8.00
1a. Describes, Calculates, and Compares the Present Values (PVs) of the Two Alternatives
Total: 1.00
Distinguished - Provides a thorough description, accurate calculations, and a relevant comparison of the present values (PVs) of the two alternatives.
Proficient - Provides a description, mostly accurate calculations, and an adequate comparison of the present values (PVs) of the two alternatives, but minor details are missing.
Basic - Provides a partial description, mostly inaccurate calculations, and a vague comparison of the present values (PVs) of the two alternatives.
Economics of Risk and Uncertainty Applied ProblemPlease comple.docx
1. Economics of Risk and Uncertainty Applied Problem
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:
2. 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?
Carefully review the
Grading Rubric
for the criteria that will be used to evaluate your assignment.
Description
:
Total Possible Score
3. : 8.00
1a. Describes, Calculates, and Compares the Present Values
(PVs) of the Two Alternatives
Total: 1.00
Distinguished - Provides a thorough description, accurate
calculations, and a relevant comparison of the present values
(PVs) of the two alternatives.
Proficient - Provides a description, mostly accurate
calculations, and an adequate comparison of the present values
(PVs) of the two alternatives, but minor details are missing.
Basic - Provides a partial description, mostly inaccurate
calculations, and a vague comparison of the present values
(PVs) of the two alternatives. Relevant details are missing.
Below Expectations - Attempts to provide a description,
calculations, and comparison of the present values (PVs) of the
two alternatives; however, the description and comparison are
missing significant details and the calculations are inaccurate.
Non-Performance - The description, calculation, and
comparison of the present values (PVs) of the two alternatives
are either nonexistent or lack the components described in the
assignment instructions.
1b. Calculates and Compares the Present Values (PVs) of the
Two Alternatives When the Discount Factor Changes from 8%
to 12%
Total: 1.00
4. Distinguished - Provides thorough and accurate calculations and
a relevant comparison of the present values (PVs) of the two
alternatives.
Proficient - Provides mostly accurate calculations and an
adequate comparison of the present values (PVs) of the two
alternatives. The comparison is missing minor details.
Basic - Provides mostly inaccurate calculations and a vague
comparison of the present values (PVs) of the two alternatives.
The comparison is missing relevant details.
Below Expectations - Attempts to provide calculations and a
comparison of the present values (PVs) of the two alternatives,
but the calculations are inaccurate or missing, and the
comparison is missing significant details.
Non-Performance - The calculation and comparison of the
present values (PVs) of the two alternatives are either
nonexistent or lack the components described in the assignment
instructions.
1c. Provides a Description of a Scenario Where the Decision
Between Two Types of Payment Streams Applies in a Real-
World Business Setting
Total: 1.00
Distinguished - Provides a thorough description of a scenario
where the decision between two types of payment streams
applies in a real-world business setting.
Proficient - Provides a description of a scenario where the
5. decision between two types of payment streams applies in a
real-world business setting, but minor details are missing.
Basic - Provides a partial description of a scenario where the
decision between two types of payment streams applies in a
real-world business setting. Relevant details are missing.
Below Expectations - Attempts to provide a description of a
scenario where the decision between two types of payment
streams applies in a real-world business setting, but significant
details are missing.
Non-Performance - The description of a scenario in a real-world
business setting is either nonexistent or lacks the components
described in the assignment instructions.
2a. Describes and Calculates the Expected Net Present Value
(ENPV) and Standard Deviation (SD) of Project A
Total: 2.00
Distinguished - Thoroughly describes the expected net present
value (ENPV) and standard deviation (SD). Demonstrates the
accurate ENPV and SD calculations of Project A.
Proficient - Describes the expected net present value (ENPV)
and standard deviation (SD). Demonstrates mostly accurate
ENPV and SD calculations of Project A, but minor details are
missing.
Basic - Partially describes the expected net present value
(ENPV) and standard deviation (SD). Demonstrates mostly
inaccurate ENPV and SD calculations of Project A. Relevant
details are missing.
6. Below Expectations - Minimally describes the expected net
present value (ENPV) and standard deviation (SD).
Demonstrates inaccurate ENPV and SD calculations of Project
A. Significant details are missing.
Non-Performance - The description and calculations of the
expected net present value (ENPV) are either nonexistent or
lack the components described in the assignment instructions.
2b. Explains Which Project Would Be Preferred Between
Project A and Project B
Total: 1.00
Distinguished - Provides a thorough explanation of which
project would be preferred between Project A and Project B.
Proficient - Provides an explanation of which project would be
preferred between Project A and Project B. Minor details are
missing.
Basic - Provides a partial explanation of which project would be
preferred between Project A and Project B. Relevant details are
missing.
Below Expectations - Provides a minimal explanation of which
project would be preferred between Project A and Project B.
Significant details are missing.
Non-Performance - The explanation of which project would be
preferred is either nonexistent or lacks the components
described in the assignment instructions.
7. 2c. Describes the Coefficient of Variation (CV) and the
Standard Deviation (SD) in Connection With Risk Attitudes
Total: 1.00
Distinguished - Thoroughly describes the coefficient of
variation (CV) and the standard deviation (SD) in connection
with risk attitudes, and thoroughly demonstrates why or why not
the decision is different from the previous decision in 2b.
Proficient - Adequately describes the coefficient of variation
(CV) and the standard deviation (SD) in connection with risk
attitudes, and demonstrates why or why not the decision is
different from the previous decision in 2b. Minor details are
missing.
Basic - Partially describes the coefficient of variation (CV) and
the standard deviation (SD) in connection with risk attitudes,
and inadequately demonstrates why or why not the decision is
different from the previous decision in 2b. Relevant details are
missing.
Below Expectations - Minimally describes the coefficient of
variation (CV) and the standard deviation (SD) in connection
with risk attitudes, and attempts to demonstrate why or why not
the decision is different from the previous decision in 2b.
Significant details are missing.
Non-Performance - The description of the coefficient of
variation (CV) and the standard deviation (SD) and the
demonstration of the reason why or why not the decision is
different from the previous decisions in 2b are either
nonexistent or lack the components described in the assignment
instructions.
8. Critical Thinking: Explanation of Issues
Total: 0.20
Distinguished - Clearly and comprehensively explains in detail
the issue to be considered, delivering all relevant information
necessary for a full understanding.
Proficient - Clearly explains in detail the issue to be considered,
delivering enough relevant information for an adequate
understanding.
Basic - Briefly recognizes the issue to be considered, delivering
minimal information for a basic understanding.
Below Expectations - Briefly recognizes the issue to be
considered, but may not deliver additional information
necessary for a basic understanding.
Non-Performance - The assignment is either nonexistent or
lacks the components described in the instructions.
Written Communication: Content Development
Total: 0.10
Distinguished - Uses appropriate, pertinent, and persuasive
content to discover and develop sophisticated ideas within the
context of the discipline, shaping the work as a whole.
Proficient - Uses appropriate and pertinent content to discover
9. ideas within the context of the discipline, shaping the work as a
whole.
Basic - Uses appropriate and pertinent content, but does not
apply it toward discovering or developing ideas. Overall,
content assists in shaping the written work.
Below Expectations - Uses content, though it may be unrelated
or inappropriate to the topic. Content does not contribute
toward the development of the written work, and may distract
the reader from its purpose.
Non-Performance - The assignment is either nonexistent or
lacks the components described in the instructions.
Written Communication: Control of Syntax and Mechanics
Total: 0.10
Distinguished - Displays meticulous comprehension and
organization of syntax and mechanics, such as spelling and
grammar. Written work contains no errors, and is very easy to
understand.
Proficient - Displays comprehension and organization of syntax
and mechanics, such as spelling and grammar. Written work
contains only a few minor errors, and is mostly easy to
understand.
Basic - Displays basic comprehension of syntax and mechanics,
such as spelling and grammar. Written work contains a few
errors, which may slightly distract the reader.
Below Expectations - Fails to display basic comprehension of
10. syntax or mechanics, such as spelling and grammar. Written
work contains major errors, which distract the reader.
Non-Performance - The assignment is either nonexistent or
lacks the components described in the instructions.
Written Communication: APA Formatting
Total: 0.20
Distinguished - Accurately uses APA formatting consistently
throughout the paper, title page, and reference page.
Proficient - Exhibits APA formatting throughout the paper.
However, layout contains a few minor errors.
Basic - Exhibits basic knowledge of APA formatting throughout
the paper. However, layout does not meet all APA requirements.
Below Expectations - Fails to exhibit basic knowledge of APA
formatting. There are frequent errors, making the layout
difficult to distinguish as APA.
Non-Performance - The assignment is either nonexistent or
lacks the components described in the instructions.
Written Communication: Source Requirement
Total: 0.40
Distinguished - Uses more than the required number of
scholarly sources, providing compelling evidence to support
11. ideas. All sources on the reference page are used and cited
correctly within the body of the assignment.
Proficient - Uses required number of scholarly sources to
support ideas. All sources on the reference page are used and
cited correctly within the body of the assignment.
Basic - Uses less than the required number of sources to support
ideas. Some sources may not be scholarly. Most sources on the
reference page are used within the body of the assignment.
Citations may not be formatted correctly.
Below Expectations - Uses inadequate number of sources that
provide little or no support for ideas. Sources used may not be
scholarly. Most sources on the reference page are not used
within the body of the assignment. Citations are not formatted
correctly.
Non-Performance - The assignment is either nonexistent or
lacks the components described in the instructions
