Spring 2018 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

In net payoffs: NPV of S=$19.9 million; NPV of B=$26.1 million; B is best. In gross payoffs: NPV of BAU=$233.9 million; NPV of S=$253.8 million ($19.9 million better than BAU); NPV of B=$260 million ($26.1 million better than BAU).

Question 2

Without consulting: EV of P=$0; value of M=$6 million; M would be better. With consulting, where X is the cost of the test, EV=$10.5 million - X. Maximum value of X for consulting to beat M=$4.5 million.

Question 3

(a) EV of BAU=-$9.5 million; EV with upgrade=-$5.5 million; upgrade reduces expected damage by $4 million.

(b) NPV of upgrade=$30.2 million. In gross payoffs, NPV of BAU=-$190 million; NPV with upgrade=-$159.8 million ($30.2 million better than BAU).

Question 4

(a) EV of B=$10; EV of N=-$60; will use B since EV is greater than 0 (and much greater than N).

(b) EV of using the test=$26; if the test reports H, use policy N; if the test reports L, use no policy at all (since the EVs of both B and N are worse than stopping after the test).

Question 5

Q=12; P=$600; profit=$56;

Question 6

Q=20; P=$2400; profit=$40,000.

Question 7

(a) PV of monopoly profit during the patent=$498k; EV of research=-$90.3k; firm will not do it.

(b) PV of CS during=$249k; Q after=40; PV of CS after=$603k; total PV of CS=$852k; expected PV of CS=$170k.

Question 8

EV to the firm=$29.7k; firm would undertake it; EV to the government=$50.4k.