Decision analysis

Assignment Help Business Management
Reference no: EM1334435

He had a winning ticket! In the ensuing days he learning of his winning one jackpot lumpsum would be $500,000. This was after taxes, and he knew what he was going to do with part of the money at it was going to be: buy a new car; pay off his college loans; and send his grandmother on a all paid trip to HI. A couple of days later he was sitting around with his friends Josh and Peyton, all are fraternity brother and Business majors. They sat around and thinking how much his retirement fund would be worth in 30 years.

If you invest (p) for dollars and (n) for year at a annual interest rate of (i) percent (n) years you would have p(1 + i)n dollars. So they figured if they invested $250,000 for 30 years in an investment with a 10% return in 30 years he would have $4,362,351, that is ($250,000 + 0.10)30).

But after he was thinking they were thinking they figured it was unlikely he would find and investment that would produce a return of precisely 10%

each and every year for the next 30 year. So they assume he would find an investment with an return of 17.5% seventy percent of the time and a return or (actually a loss)-7.5 thirty percent of the time. Such an investment should produce an average annual return 0.7(17.5%) + 0.3(-7.5) = 10%. Josh felt certain that Patrick could still expect his $250,000 to grow to $4,362,351 in 30 yrs because $250,000 (1 + 0.10)30 = $4,362,351.

Peyton thought Josh was wrong. Peyton said Patrick should see a 17.5% in 70% of the 30 years (0.7)30 = 21 yrs)and a -7.5% return in 30% of the 30 years (0.3(30 = 9 yrs). So, according to Peyton, Patrick should have $250,000 (1 + 0.175)9 = 3,664,467 after30 yrs.

But that's $697,884 less than what Josh says Patrick should have. Josh assumes Peyton is wrong because the "good" return of 17.5% would ocur in each of the 21 years and the "bad" return -7.5 would ocur in each of the last 9 years. But Peyton counteracted the argument by saying that the order of the good or bad return doesn't matter.

Patrick is really confused. So what do you think? Who is right, Josh or Peyton? Can you explain why? Thanks

Reference no: EM1334435

Reviews

Write a Review

 

Business Management Questions & Answers

  Find the web site for roi institute

Use a search engine of your choice and find the web site for ROI Institute, Inc. Once you have found the website, click on "Tool," and review the "Nations Hotels-Measuring the ROI in Business Coaching."

  Procurement of the construction product in united kingdom

Procurement systems have changed enormously, due to changes in concept on risk apportionment, economic costs & in the UNITED KINGDOM due to Government led reports & initiatives e.g. Egan report & PFI initiative. However surprisingly; efficiency has n..

  Business accounting ethics

A corporation, owned by one owner, decides to go out of business due to excessive losses. When the stock was originally issued, the owner did not specify that the stock purchased (at a price of $1000) would be considered §1244 stock. Explain wheth..

  Forces of influence impact the decisions

How did your "Forces of Influence" impact the decisions. Add any examples as a method for enhancing the detail.

  What are the potential benefits of each stage

Why an ERP systems journey may never end What are the possible stages in an ERP systems journey? What are the potential benefits of each stage?

  Percentage of selling price

Suppose a retailer uses a mark-up of 25% based on selling price and found that his competitor was using a mark-up of 30% based on cost and wanted to know what this would be as a percentage of selling price.

  Non value-maximizing motives for mergers

Explain how agency problems may lead to non value-maximizing motives for mergers.

  Breakdown of typical russian organized crime

Discuss Russian organized crime in the U.S. As a minimum, your answer should include a breakdown of the "typical" Russian organized crime member and what you propose the U.S. can and should do to counter this very real and significant organized cr..

  Key abilities and qualities to effectively reach objective

For a company to create a culture of sustainability, leaders must possess key abilities and qualities to effectively reach this objective.

  Explaining sub-optimal decision

Organization where personal motivation and/or emotions on the part of decision maker(s) may have cause a sub-optimal decision to be made.

  Identifying the official levels of leed

Identify the official levels of LEED( Leadership in Energy and Environmental Design) building certification; then locate a building in your locale.

  Importance of elements that make a good leader

What is the importance of understanding the elements or factors that make a good leader?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd