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Question;Problem;#1 (16);The;ABC corporation is interested in purchasing a small manufacturing firm (making;car seats). An initial Investment of $15;million is required. Let us assume that;the sale price of the car seat is normally distributed with a mean of $65, and standard deviation of;$4.00 per unit. Also we assume that the;sales volume is governed by the following empirical distribution;Yearly;Sales Volume (in 1000);Probability;--------------------------------------- ----------------------;90 ? 120 0.25;120 -- 150 0.47;150 ? 180 0.28;The;cost (of production) is uniformly;distributed between $20-$50. We want to;accurately estimate the yearly net cash flow assuming a corporate (composite)tax rate (T) which is 45% now but there is a 60%;Probability that it will jump to 55% starting next year. Use the following notations;and equations to the questions asked (See what is required below).;Notations;YCF = Annual cash Flow, R;= annual Revenue, C;= annual cost;PC= production cost per unit, T =;annual tax, F= corporate tax rate;P= Sale Price per unit, V=;sales volume;Equations;SCF = R-C-T, R=P * V, C = PC * V, T= F * (R-C-D) where D=;depreciation per year. Use straight line;depreciation for n=15 years;What is required;Assume D=depreciation (linear deprecistion for 10 years),develop the simulation mode, run;it 60 times and determine;1).;The expected value (mean) of the yearly cash flow;2).;Determine the limits of ? corresponding;to a 98% confidence level. (where ? is;the true mean yearly cash flow);3).;If a yearly cash flow of less than ? of;the above average (determined in part 1) is considered a Total;Loss, determine the probability that the company will be in ?Total Loss? situation.;Problem;#2 (16Points);A;nuclear power company is deciding whether or not to build a power plant at city ?D? or city? R?.;The cost of building the power plant is $10 million at city D and $20;Million at city C. IF the company builds at city D, however, and an earthquake;occurs (at that city) during the next 5 years, construction will be terminated;and the company will loose $10 million.(and will still have to build at city C). The company, from historical data, believes that there is 20% chance that an;earthquake will occur in city D during the next 5 years. For $1 million, a geologist can be hired to analyze the fault structure;in City D. He will either predict that;an earthquake will occur or will not occur.;The geologist?s past record indicates that he will predict an;earthquake on 95% of the occasions for;which an earthquake will occur. He will also predict no earthquake on 90% of;the occasions for which an earthquake will not occur. Use this information and;answer the following questions;a). develop the decision tree of the situation. (Make sure the Tree has all the relevant;information on it);b)-;Determine Pr(the geologist will say Earthquake);c)-;Should the power plant hire the geologist.;D).;What is the least attractive alternative available for the company now.;Problem #3. (18 Poimts);The Nestle Financial Services Company, is;considering investing $20 million in stock market. The company uses regression analysis to;predict the market condition for the next 12 months before determining to;invest in stock or the alternative, invest in Bonds and CDs (with only 2.5% fixed;and sure return/year). They have decided;that The United State?s stock market;index (Y) fluctuations is related to a;number of overseas market indexes, including, European Market Index (X1), Asian;Market index (X2), Far East market index (X3), and South American market;index. For the past 10 years, the;average semiannual market index are available and are presented in the;following table.;Year Y X1 X2 X3 X4;1 240 35 24 91 100;236 31 21 90 95;2 270 45 24 88 110;274 60 25 87 88;3 267 75 24 88 110;276 60 25 91 105;4 288 50 25 90 100;281 38 23 89 98;5 245 27 26 79 112;256 38 25 89 87;6 275 61 23 91 98;232 32 24 87 101;7 310 73 27 92 109;306 66 27 95 102;8 268 74 23 89 103;301 65 25 91 94;9 300 80 25 87 97;296 84 25 86 96;10 307 64 28 98 85;316 72 26 99 99;A). Determine the relationship between Y and X1;X2,?X4. Interpret the resulting equation;B). Test the significance of regression;coefficients using?=0.05;C). Determine a 95% confidence interval for mean value of Y when X1=75, X2= 24;X3 = 90, and;X4=104;D). It is;estimated that, Total gain in value of stock (in one year) is determined;from the equation;Yearly;gain = (Y-280)/10) * 1.05 Million.;If the condition stated in part C above;represent the;Estimate for the index for the;next year, should the company invest in stock or buy bond and realize a;rate of return of 2.5%.. At that point, what is the probability that;buying stock will be more profitable;than the alternative (ie., buying Bond;CDs).;Problem #4 (16 Points);Oilco;must decide whether or not to drill for oil in the South China sea or not. It cost $100000 and if Oil is discovered;its value is estimated to be $600000. Oilco believes there is a 45% chance that the field contain;oil. Before making decision on drilling;Oilco can hire (for $10000) a consultant;to obtain more information about the likelihood that the field contain oil.;There;is Y % chance that the consultant will;issue a favorable report (saying there is oil). Given a favorable report, there is 80% chance;that the field contain oil. Given an;unfavorable report, there is;There;is only w % chance that the field;contains Oil.;1);Assuming Y=50% and W= 10%, Determine;Oilco?s Optimum course of action.;2);the historical information shows that;Y >30, and W;<25. Conduct a;sensitivity analysis, graph a tornado;(type) diagram and interpret the results (best course of action under different;conditions)


Paper#52982 | Written in 18-Jul-2015

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