Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 2MC
To determine
The expected
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The business manager decides to access the latest macroeconomic predictions from the Bank of England. This provides him with the following probabilities: Recession (15%), Low Growth (30%), Medium Growth (35%), and High Growth (20%). Which option is preferred according to the expected monetary value (EMV) criterion? What attitude to risk does this represent?
A manager has to decide whether to prepare a bid or not. It costs P5,000 to prepare the bid. If the bid is submitted, the probability that the contract will be awarded is 50%. If the company is awarded the contract, it may earn an income of P100,000 if it succeeds, or pay a fine of P8,000 if it fails. The probability of success is estimated to be 80%.
What is the expected value if the contract is awarded?
People in a certain group have a 0.75% chance of dying this year. If a person in this group buys a life insurance policy for $6000 that pays $1,000,000 to her family if she dies this year and $0
otherwise, what is the expected value of the policy?
(enter a minus sign if necessary and round your answer to the nearest dollar).
$
Chapter 17 Solutions
Managerial Economics: A Problem Solving Approach
Knowledge Booster
Similar questions
- Using the normal table or software, find the value of z that makes the following probabilities true. You might find it helpful to draw a picture to check your answers (a) P(Zz) =0.01 (e) P(Z|arrow_forwardA corporation is trying to decide whether to buy the patent for a product designed by another company. The decision to buy will mean an investment of $8 million, and the demand for the product is not known. If demand is light, the company expects a return of $1.3 million each year for three years. If demand is moderate, the return will be $2.5 million each year for four years, and high demand means a return of $4 million each year for four years. It is estimated the probability of a high demand is 0.4, and the probability of a light demand is 0.2. The firm's (risk-free) interest rate is 12%. Calculate the expected present worth of the patent. On this basis, should the company make the investment? (All figures represent after - tax values.)arrow_forwardA large company in the communication and publishing industry has quantified the relationship between the price of one of its products and the demand for this product as Price = 150−0.01 × Demand for an annual printing of this particular product. The fixed costs per year (i.e., per printing) = $50,000 and the variable cost per unit=$40. What is the maximum profit that can be achieved if the maximum expected demand is 6,000 units per year? What is the unit price at this point of optimal demand?arrow_forwardA Real estate investor has the opportunity to purchase a small apartment complex. The apartment complex costs $4 million and is expected to generate net revenue (that after all operating and finance costs) of $60,000 per month. Course, the revenue can vary because the occupancy rate is uncertain. Considering the uncertainty, the revenue could vary from a low -$10,000 To a high of $100,000 per month. Assume that the investors objective is to maximize the value of the investment in the 10 years. The city Council is currently considering an application to rezone a nearby empty parcel of land. The owner of that land wants to build a small electronics assembly plant. Was plant does not really conflict with the city’s overall land use plan, but it may have a substantial long-term negative effect on the value the nearby residential district in which the apartment complex is located. Because the city Council currently is divided on the issue and will not make a decision until next month, the…arrow_forwardA drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $I million per year of profit forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting one year to make the investment?O $88 millionO$122.72 millionO $201.22 millionO $64.5 millionarrow_forwardYou are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald's or a Penn Station East Coast Subs franchise. McDonald's indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be -$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and -$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.arrow_forwardAn aggressive investment in Industry 4.0 next-generation technology has the potential to save your company $7M if it is very successful, or $3M if it is moderately successful, but it will cost $2M if it fails. The relative risk for the project is $1.25M. The company has a risk tolerance of $1 million and has assigned a utility value of .777 based on an exponential utility function for this investment. What is the value of a safe investment that the company would just as soon choose rather than investing in the IT project? A. $2M B. $1.5M C. 52.75 D. $1.25Marrow_forwardYou are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current Salary. You look into opening a small grocery store. Suppose that the store has annual cost of $150,000 for labor, $60,000 for rent and $30,000 for equipment. There is one-half probability that revenues will be $20,000 and a half probability that revenue will be $420,000 a. WHat is your accounting and economic profit? b. Will you quit your job and try your hand at being an entrepreneur? c. Suppose the government imposes a 25 percent tax on accounting profits: this tax is only levied if a firm is earning positive accounting profits. What will your after tax accounting profit be in the low revenue case?arrow_forwardYou are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current Salary. You look into opening a small grocery store. Suppose that the store has annual cost of $150,000 for labor, $60,000 for rent and $30,000 for equipment. There is one-half probability that revenues will be $20,000 and a half probability that revenue will be $420,000 a. In the low revenue Situation, what will your accounting profit or loss be? b. In the high revenue situation, what will your accounting profit or loss be? c. On average, how much do you expect your revenue to be?arrow_forwardYou are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current Salary. You look into opening a small grocery store. Suppose that the store has annual cost of $150,000 for labor, $60,000 for rent and $30,000 for equipment. There is one-half probability that revenues will be $20,000 and a half probability that revenue will be $420,000 a. In the high revenue case? what will your average after tax Accounting profit be? hat about your average after tax economic profit? will you Want to quit your job and try your hand at being an entrepreneur? other things equal, does the imposition of the 25 percent profit tax increase or decrease the supply of entrepreneurship in the economy?arrow_forwardLandberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's…arrow_forwardThree alternative insulations are being considered for installation on a machine part. After the initial installation, if the insulation fails in any future year, it is replaced by an identical one at a cost lower than the initial cost. The costs and probabilities of failure in any year are given in the table below. Insulation thickness 2 inches 3 inches 6 inches Initial installation cost $900 $1,200 $1,800 Probability of failure in any given year 26.7% 14.4% 6.32% Replacement cost anytime insulation fails in future $600 $800 $1,200 If the analysis period is infinte (i.e, N = infinity), calculate the expected EUAC of the 2-inch insulation. The MARR is 11% per year. OA. $414 O B. $259 O C. $104 O D. $155arrow_forwardarrow_back_iosSEE MORE QUESTIONSarrow_forward_ios
Recommended textbooks for you
- Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning