Fall 2014 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 for L=$70M, NPV for P=$89M. Policy P is better because its NPV is higher.

Question 2

Without the test: EV of A=$76M and payoff of C=$80M.  EV of the test=$87M, so it's better than the best no-test option. Proceed with the test.  If it's successful, implement A with payoff $135M; if it's not successful, implement C with payoff $55M.

Question 3

For building right away, the expected NPV of H is $47M and the NPV of C is $50M. The expected NPV of waiting and then picking is $60M. Best policy would be to wait and then do H if rainfall is low or C if rainfall is normal.

Question 4

Expected payoff with the study is $16M-X where X is the price of the study.  The best alternative without the study would be to upgrade, which has a payoff of $12M.  The WTP is thus $4M.

Question 5

Q=88, P=$112, profit=$112.

Question 6

Q=24, P=$1400, profit=$28,800.

Question 7

Expected NPV=-$256k.  Don't proceed with the project.

Question 8

(a) PV of CS in the US during the patent period=$179k; PV of CS in the US after=$434k; PV to the US overall=$613k; PV to the rest of the world (ROW) after=$3.769M; total PV of CS=$4.382M; expected PV of CS=$1.753M.

(b) Minimum X to induce the firm to proceed: $641k.  Expected value of the policy to the philanthropist=$1.251M.  The philanthropist would want to proceed with the policy: it could offer the firm enough to induce it to go forward and still come out ahead.