Reference no: EM13301880
Question: 1 The FIU Marching Band is out of money. It hurts when halftime music is provided by the band of the other team at a home game. They have two choices: apply for federal grant money or do a major fundraiser. They cannot do both. The band's manager believes he has a 90% chance that he will win a grant of $25,000 if he submits the grant application. Grants in this category are for a fixed amount, so if he loses the grant, he'll have no money to run the band. Based on his past fundraising experience, he estimates that if he runs a local fundraiser, he has a 30% chance of raising $30,000 and 70% chance of raising $20,000. Create a decision tree to help him determine which decision has the higher EMV.
Q-13a: What is the EMV of applying for a grant?
Q-13b: What is the EMV of doing a major fundraiser?
Q-13c: What should the band do?
Question 2: Let's say you own a small construction company. You need to decide whether to buy a bulldozer to add to your equipment fleet. You assume that the construction industry could be Good, Mediocre, or Bad, and associate a dollar value for your profits with each possible state of the economy. Your profits will also depend on whether you buy the equipment as follows:
*Buy the bulldozer and the economy is good should yield a profit of $120K.
*Buy the bulldozer and the economy is mediocre should yield a profit of $80 K.
*Buy the bulldozer and the economy is bad should yield a profit of -$50K. (That's negative!)
*Don't buy the bulldozer and the economy is good should yield a profit of $100K using your other equipment.
*Don't buy the bulldozer and the economy is mediocre should yield a profit of $75K using your other equipment.
*Don't buy the bulldozer and the economy is bad should yield a profit of $60K using your other equipment.
*The probability that there is a "good" economy is 20%.
*The probability that there is a "mediocre" economy is 55%.
*The probability that there is a "bad" economy is 25%.
Q-2a: Draw the decision tree.
Q-2b: What is the EMV associated with the decision to buy the bulldozer?
Q-2c: What is the EMV associated with the decision not to buy the bulldozer?
Q-2d: What is the best decision?
Question 3: You must choose between two passive investments.
Investment A requires an initial investment of $50,000 but will return $71,000 in three years.
Investment B requires an initial investment of $45,000 but will return $60,000 in two years.
You choose a discount rate of 10% to make your decision.
Q-3a: What is the present value of each investment?
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