Bus 640 Week 1

Economics of Risk and Uncertainty Applied Problems

Sumer Hawkins

BUS 640: Managerial Economics

Instructor Zhimin Huang

January 11, 2016

Problem 1

A generous university benefactor has agreed to donate 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.

A. If the school takes the lump sum of 1 million they will not accrue any interest. The school will get one payment of 7 million in year one and another 7 million in two years. This would be a total with interest of $12,482,853.22

a. 6,481,481.48 + 6,001,371.74 = 12,482,853.22

B. If the percentage was changed to 12 percent, the school would still only receive 12 million in the lump sum for year 0, but with the split in payment the school will receive the a total of 11,860,357.10

C. A real life scenario where this happen is when people win the lottery. When a person wins the lottery they have a couple of option when it comes to receiving their win-fall. If the person decided to take the lump sum, currently they would pay 35% of their total winnings. For example, if a person wins 59 million, then with the 35% taxes, the person would actually receive 38,350,000. If the person takes a lump sum, then they will pay state, local, and federal government over the course of 26 years. Unlike the scenario above, the option to take money over time may not be the best option. The best option would be to take the lump sum because the taxes taken would be a one-time deal. Taking money overtime would mean essentially paying 35% or the current taxes on the winning for 26 years which could end up costing the person more money in the long run

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...