Spring 2016 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

NPVs: C = $7.01 M, U = $8.84 M. U is best.

Question 2

Expected NPVs of proceeding without testing: S = $7 M, L = $5 M. Expected NPV of testing and then choosing: $9 M.  Test then choose S if C occurs and L if N occurs.

Question 3

Expected NPVs of acting at 0: A = $97 M, C = $205 M. Expected NPV of waiting and then choosing: $242 M.  Wait, then pick A if S occurs and C if N occurs.

Question 4

EVs: proceeding without a test = $ 270 M, testing = $400 M. Testing is better.

Question 5

P = $20, Q = 115, profit = $150.

Question 6

P = $230, Q = 75, profit = $11,250.

Question 7

EV = -$74,950. Firm does not proceed.

Question 8

During: CS = $5,625, externalities = $4,000, total = $9,625; PV of total = $119,949.  After: CS = $22,500, externalities = $8,000, total = $30,500; PV of total = $229,903.  Total PV = $349,851. Expected PV = $87,463.

Question 9

Expected NPV to firm = $8,040. Expected NPV to goverment = $4,473. Both would want to proceed.