Fall 2015 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 R=$77 million; NPV of B=$70 million; R is best.

Question 2

Net benefits of A=$60 million; EV of B=$80 million; site B is best.

Question 3

Profits under BAU=$-15 million; expected profits under P=$-1 million; profits under I=$5 million. I would be preferred by firms and is sufficient to induce them to invest.

Question 4

EV of hiring the consultant=$38 million; EV of H without the consultant=$10 million; EV of L without the consultant=$5 million. Paying the consultant is best and $28 million better than the next best option.

Question 5

Q=38, P=$210, profits=0.

Question 6

Q=34, P=$6900, profits=$231,200.

Question 7

PV of profits if the project succeeds=$2.881 million; NPV if the project succeeds=$881k; EV of the project=$-1.136 million. No, the firm will not undertake the project.

Question 8

(a) Total CS if the project succeeds=$4.93 million; expected CS=$1.48 million.
(b) Expected overall payoff to the firm=$154k; the firm would undertake the project. Expected payoff to the government=$188k; the government would proceed.