Fall 2011 Final Exam Solution

Here are the final numerical results for each section of the exam.  You can use them to check your work if you do the exam for practice.  If you have trouble with the problems, or don't get the answers shown here, stop by during office hours or make and appointment and we can go over them.

Question 1

NPV of upgrading = $4.67M; worth upgrading. Also acceptable: PV of upgraded highway is $44.7M which exceeds the $40M PV of the existing highway. 

Question 2

(2a) EV of trial = $150M; settling is better by $100M.

(2b) EV of trial = -$410M; settling is better.

Question 3

(3i) ENPV of A = $22.8M; ENPV of B = $15M; A would be adopted.

(3ii) ENPV of the study = $69.9M; worth conducting it.

Question 4

Horizontal intercept of the BC, the PVI, is $183k.  C0 = $68.75k and she saves $31.25k.  C1 = $137.5k. Her indifference curves are right angles.

Question 5

Q=443, P=$671, profit=0.

Question 6

(6A) Q=36, P=$185, profit=$6480.

(6Bi) PV=$31,555.

(6Bii) ENPV=-$3378; firm would NOT undertake it.

(6Ci) ENPV to the firm=$835; firm would undertake it.

(6Cii) ENPV to the VC=$1691; VC would undertake it.  Both parties can benefit even though the firm alone wouldn't undertake the project because the VC can borrow at a much lower interest rate.  That increases the PV of its share of the profits relative to what those profits were worth to the firm.