Fall 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

PVI for each option: BAU=$160k; A=$180k; B=$170k.  Option A is best.  C0=$90k; C1=$112.5k; borrows $22k; diagram omitted.

Question 2

NPV of each option: R=$55.2 M; S=$60.8 M. S is best.  Alternately, the PV cost of each: BAU=$266.7M; R $211.5M (saving of $55.2 vs. BAU); S=$205.9M (saving of $60.8M vs. BAU).

Question 3

EV of each option: BAU=-$8 M; D=-$4 M; C=-$6 M.  D is best.

Question 4

EV without the consultant = $27.5 M; EV with the consultant when the consultant's price is X = $30.1 M - X.  WTP for the consultant = $2.6 M.

Question 5

Q=56; P=$356; profit=$256.

Question 6

Q=26; P=$530; profit=$13,520.

Question 7

PV of monopoly profits if the project succeeds and is approved=$168.5k; ENPV of the project= -$12.3k.  The firm should not undertake it.

Question 8

(a) Annual CS: during monopoly=$6760; after monopoly=$27,040.  PV of CS=$288k; EPV of CS=$34.6k. 

(b) Firm's ENPV with the policy=$4.7k; firm would proceed with the project.  Goverment's EV=$17.6k.  Not required: total gain=$22.3k, which is exactly the sum of the original gains to each of the parties: $34.6k-$12.3k.