University Of Michigan Operations And Supply Chain Management Assignment Help - Managerial Economics

Question - Economics of Risk and Uncertainty Applied Problems

Please, complete the following two applied problems in a W ord or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by using the
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Week 1 Assignment Study Guide

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 decisi ...Read More on change if the opportunity interest rate was
12%? Please, show all your calculations.


2. 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.
ï‚· Business 1 is an innovative protein energy drink, which has ENPV of $100,000 with a standard
deviation of $40,000.
ï‚· 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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