### What is the expected monetary value of the option

Assignment Help Engineering Mathematics
##### Reference no: EM131524478

Question: Shu Mei Wang is going to start a new business to provide a geographical-information system (GIS) to be used by small businesses in selecting promotions and for other marketing applications.2 She will provide her service to on-line subscribers via a sophisticated Internet server. She is considering two alternative servers: the GZ1000, which will cost \$21,000, and the GZ1450, priced at \$33,000. The choice of server depends on the peak number of subscribers she will have. Standard practice is to plan the server capacity to be 10% of the number of subscription accounts. The GZ1000 has capacity for 80 connections and the GZ1450 for 140 connections. The number of subscriptions for the year will be settled within the first month of the year and continue for the entire year, but will not be settled before the server must be ordered.

Shu Mei expects that it is equally likely that her business will attract 400 or 800 accounts in the first year of operation. In the second year, there is a 50% chance that there will be 1,200 accounts and a 50% chance that accounts will stay at 800, if the number in the first year is 800. On the other hand, if there are 400 firstyear accounts, Shu Mei assesses a 50% chance that accounts will remain at 400 and a 50% chance that they will go up to 800 in the second year. The price per month per GIS client account will be \$30 regardless of usage. The operating cost per account amounts to \$13.50. Total fixed overhead for the business will be \$9,000 per month. For simplicity, ignore time value of money and taxes for each option.

a. Should Shu Mei buy one GZ1000 or one GZ1450, based on expected profit over the first 2 years of operation? (Either server will have a useful life of 2 years and zero salvage value.)

b. Expand option: Shu Mei can decide in 1 year to expand the server operation. Suppose that the same GIS servers will be available 1 year from now at 40% of the original price on the resale market. Does her initial decision change?

c. Switch option: It might be a good idea for Shu Mei to sell her GZ1000 after 1 year and buy the discounted GZ1450, rather than buy another server. Would Shu Mei want to do this? What is the expected monetary value of this option? Assume resale value is 40% of original price.

d. Exit option: In the event that demand is low after one year, Shu Mei may just want to get out of the business. If she does, the original server would be salvageable at 40% of the original price. Does this option affect the initial investment decision?

e. Delay option: All these options and the inherent uncertainty have made Shu Mei nervous about the business. Perhaps she should delay for a year, observe the demand for her service, and then buy a used server (at the 40% discounted price) to capture the secondyear demand. Is this option attractive when compared with the other options?

### Write a Review

#### Determine the number of tardy jobs

Jane Reed bakes breads and cakes in her home for parties and other affairs on a contract basis. Jane has only one oven for baking.

#### What are the mean variance and standard deviation

Annual profit (P) is the product of total annual sales (S) and profit per unit sold (X); that is, P = X · S. It is desired to know the probability distribution.

#### Find direct relationship between the heat and wave equations

Show that the wave equation does not, in general, satisfy a maximum principle - diffusion equation on the half-line with Robin boundary condition

#### Find the optimal solution using excel solver

Set up this problem in excel; find the optimal solution using excel solver, and the solution's sensitivity report. What are your solution and your objective function value? For each constraint: what is its shadow price, what is its slack (or, you ..

#### Find actual values fall between the assessed fractiles

Reconsider your assessed 0.05 and 0.95 fractiles in Problem 8.13. If you are perfectly calibrated when judging these fractiles, then you would expect.

#### Calculate the tangential

You will need the parameterization formula for a helix discussed in class. (2) Since you want ten turns of wire, it is convenient to let the range of parameter t be 0

#### What is the present equivalent of spivey lottery winnings

Spivey just won the Powerball lottery! The \$20,000,000 jackpot will be paid in 20 annual installments of \$1,000,000 each, with the first payment to be paid.

#### Formulate hypothesis to determine the mean price

The cost of a or VS2 clarity. H color diamond from Diamond Source USA is \$5600 (Diamond Source website. March 2003).

#### What is probability that arrivals to this system are blocked

Obtain the steady-state probabilities for a GE2/GE2/1/1 system where an arrival to a full system blocks the arrival process, and with inter-arrival time.

#### What can you say about the parity of a - s

Given any integers a, b, and s, if a - b is odd and b - s is even, what can you say about the parity of a - s -Detective Sharp interviewed the men and determined that all were lying except for one.