Premium Essay

Economics of Risk and Uncertainty

In:

Submitted By iluvmb17
Words 504
Pages 3
Assignment 1-Economics of Risk and Uncertainty Applied Problems

BUS640: Managerial Economics
John Sellers
July 1, 2013

Assignment 1-Economics of Risk and Uncertainty Applied Problems
1a.) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative? using the formula, PV=FVn/(1+r)n for the present value where n represents number of years in the sequence and r represents the rate, which in this case is the opportunity rate of 6%, the present value of the second alternative is $10,070,000. The calculation for this equation is PV($10m) = $5.5m/(1.06) + $5.5m/(1.06)(1.06) = $5.18m + $4.89m = $10,070,000.

b.) Which of the two alternatives should be chosen and why? " Cash flows from year 2, 3, 4, 5, and further into the future must be discounted progressively more heavily since even smaller sums held presently would grow to a dollar if allowed to earn interest for more years from the present period out to year 2, 3, 4, or 5 and beyond" (Douglas, 2012). Using the present value method, I would chose the second alternative as it would net an extra $70,000 that could be put to very good use at the University.

c.) How would your decision change if the opportunity interest rate was 12%? Since the second alternative would change to $9,290,000 if the opportunity rate was 12% instead of 6%, my decision would indeed change. PV($10m) = $5.5m/(1.12) + $5.5m/(1.12)(1.12) = $4.91m + $4.38m = $9,290,000.

2a.) Apply the coefficient-of-variation decision criterion to these alternatives to find out which is preferred by the angel investor, assuming that he/she is risk-averse. Business 1- 40,000/100,000=0.4. Business 2- 25,000/60,000=0.42. Business 1 would be preferred by angel investor because it is less risk-averse.
b.) Apply the maximin criterion, assuming that the worst outcome in Business 1 is to lose

Similar Documents

Premium Essay

Issues in Risk Mgnmt

...in Risk Analysis Risk refers to a situation in which possible future events can be defined and probabilities assigned (Keat & Young, 2009). It is the chance that an investment's actual return will be different than expected (Risk, 2013). With risk comes the possibility of losing some or all investments (Risk, 2013). Uncertainty refers to situations in which there is no viable method of assigning probabilities to future random events (Keat & Young, 2009). In order to understand the relationship between uncertainty and risk, first I would like to define risk. First, in technology and economics, risk is expressed as an expected value that an event will be accompanied by undesirable consequences (The Difference Between Risk and Uncertainty, 2013). Here it is measured by both the probability of the event and the seriousness of the consequences (The Difference Between Risk and Uncertainty, 2013). For example, the probability that a bearing will fail in five years is .001 percent (The Difference Between Risk and Uncertainty, 2013). In the second area of planning, risk is what can happen that will cause the project to fall behind schedule or go over cost. During planning, the known-unknowns are risk (The Difference Between Risk and Uncertainty, 2013). The final area is in management; risk is the possibility that outcomes will be different from what we expect. It is the effort to manage both the known-unknowns and unknown-unknowns (The Difference Between Risk and Uncertainty, 2013)...

Words: 818 - Pages: 4

Premium Essay

Financial Markets, Insurance and Entrepreneurship in the Countries of the Middle East and North Africa (Mena) Region

...broadly defined as the capability to start independent businesses activities and possibly introduce new combinations of productive factors. The analysis is based on the distinction between uncertainty and risk that Knight unveiled (Knight, 2012) arguing that risk involves situations where a decision maker face unknown outcomes but known ex-ante probability distributions, while uncertainty is characterized by situations in which the probability distribution of a random outcome is unknown. Consequently, while risk can be covered by insurance, uncertainty normally is not. The other pillar of this research is the role of entrepreneurship; a factor that the economic literature has not considered for long time and that in the last 20 years has become the center of any strategy for economic growth in emerging and advanced economies. The discovery of the role of entrepreneurs dates back to Schumpeter (Schumpeter, 1982a) who regards entrepreneurs as the engine of economic growth. Schumpeter (Schumpeter, 1982a) has a view of the entrepreneur as the one who introduces innovation, but does not bear the risk. The study intends to investigate on two main aspects: whether insurance and entrepreneurship interact; and whether the widespread availability of insurance leads to a reduction of uncertainty and support the deployment of entrepreneurship. The considerations related to these two...

Words: 18799 - Pages: 76

Premium Essay

Dafdafdfadasfds

...importance of each factors without providing any statement or evidence to support his selection. For example, he weighted the importance of “Economic Impact” to be “10”. What if the risk of uncertainty far out weighted the economic benefit, the final project score will be far below 80 as stated on the proposal.    * Significant amount of money was not include in the budget The initial budget leaves a significant amount of money out of considerations, which include up-front investment in staff, software, hardware, and management. More importantly, for the economic impact, the manager just focused on the installation cost in the initial year. For a system like SAP, it will definitely occur a material amount of maintaining and updating fee down the road after implementing the system. The total benefit, NPV and ROI will drive down to a certain amount when you consider about those costs in the future five years.    * Other critical uncertainties need to be considered The proposal shows limited risks of installing the new system, such as organizational risk, definitional uncertainty, technical uncertainty, IS infrastructure risk. Still, there are a number of critical uncertainties that need be considered by the company. Those uncertainties include delivery delayed, installment and implement failure, overrun the budget and so on. All these risks that are not taken into account may be caused to a failure of the whole project.  In Conclusion: The weighted Score of the initial project-scoring...

Words: 301 - Pages: 2

Premium Essay

12345678

...Heisenberg’s Uncertainty Principle and its Implications for Financial Institutions Submitted in Partial Fulfilment of Master of Business Administration By KARTIK CHANDRA CHATURVEDI Batch (2013-2015) University Roll No: S133F0010 December 2014 Under the guidance of NIDHI KAICKER SCHOOL OF BUSINESS, PUBLIC POLICY AND SOCIAL ENTREPRENEURSHIP AMBEDKAR UNIVERSITY DELH PAGE 1 CERTIFICATE This is to certify that I have successfully completed the project titled Heisenberg’s Uncertainty Principle and its Implications for Financial Institutions submitted in partial fulfilment of the requirements for the Degree of Master of Business Administration at the School of Business, Public Policy and Social Entrepreneurship, Ambedkar University Delhi. It is further certified that the submitted report is based on original research work carried out by me. The material obtained from secondary sources is duly acknowledged. [Student Signature] KARTIK ……………………………………………………………………………..CHANDRA ……………………………………………………………………………..CHATURVEDI Roll No S133F0010 Batch: 2013-15 [Dean Signature] Dean SBPPSE [Faculty Signature] Faculty Advisor PAGE 2 ACKNOWLEDGEMENT I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals in the organization and School of Business, Public Policy and Social Entrepreneurship, Ambedkar University, Delhi. I would like to extend my sincere thanks to all of them. I am highly...

Words: 7135 - Pages: 29

Premium Essay

Going

...01 TechnicAl during The recenT globAl economic crisis, isA 570, going concern hAs been A well-esTAblished source of guidAnce for AudiTors. AddiTionAl direcTion hAs been provided by The iAAsb’s prAcTice AlerT AudiT considerATions in respecT of going concern in The currenT economic environmenT, issued in JAnuAry 2009. relevAnT To AccA QuAlificATion pAper p7 The recent global economic crisis, commonly referred to as the credit crunch, has provided many challenges for both the preparers and the auditors of published financial statements. For auditors, ISA 570, Going Concern is a well-established source of guidance, and additional direction has been provided by the IAASB’s Practice Alert Audit Considerations in Respect of Going Concern in the Current Economic Environment, issued in January 2009. In the UK, the APB issued the Bulletin Going Concern Issues During the Current Economic Conditions in December 2008. Both of these are examinable documents for the Paper P7 exams in 2010. The auditor’s objectives in relation to going concern ISA 570 contains well-established guidance on going concern, including the following objectives for the auditor: ¤ to obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements ¤ to conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt...

Words: 1895 - Pages: 8

Premium Essay

Sap Proposal

...importance of each factors without providing any statement or evidence to support his selection. For example, he weighted the importance of “Economic Impact” to be “10”. What if the risk of uncertainty far out weighted the economic benefit, the final project score will be far below 80 as stated on the proposal. * Significant amount of money was not include in the budget The initial budget leaves a significant amount of money out of considerations, which include up-front investment in staff, software, hardware, and management. More importantly, for the economic impact, the manager just focused on the installation cost in the initial year. For a system like SAP, it will definitely occur a material amount of maintaining and updating fee down the road after implementing the system. The total benefit, NPV and ROI will drive down to a certain amount when you consider about those costs in the future five years. * Other critical uncertainties need to be considered The proposal shows limited risks of installing the new system, such as organizational risk, definitional uncertainty, technical uncertainty, IS infrastructure risk. Still, there are a number of critical uncertainties that need be considered by the company. Those uncertainties include delivery delayed, installment and implement failure, overrun the budget and so on. All these risks that are not taken into account may be caused to a failure of the whole project. In Conclusion: The weighted Score of the initial project-scoring...

Words: 304 - Pages: 2

Premium Essay

Auditing

...PERFORMING AUDIT AND REVIEW ENGAGEMENTS BULLETIN Staff contact Chi Ho Ng, CA, CPA(IL), MBA Principal Auditing and Assurance Standards Department 277 Wellington Street West Toronto, ON M5V 3H2 Tel: (416) 204-3443 E-mail: chiho.ng@cica.ca Fax : (416) 204-3408 Auditing Considerations in an Uncertain Economic Environment Uncertainties in the current economic environment There is a possibility that the Canadian economy may weaken in the near term. This has been noted in various sources, including the economic forecast for Canada issued by the Organization for Economic Co-operation and Development. Heightened risks from renewed financial-market turmoil linked to the European sovereign debt crisis and high levels of household indebtedness are eroding consumer confidence. In January 2009, staff of the Auditing and Assurance Standards Board (AASB) issued a Risk Alert, “Auditing Considerations in the Current Economic Environment,” to highlight matters for auditors to consider when responding to higher risks of material misstatements of financial statements of entities significantly affected by the 2007/2008 downturn in the Canadian economy. This Bulletin updates the January 2009 Risk Alert to make reference to the Canadian Auditing Standards...

Words: 7297 - Pages: 30

Premium Essay

Going Concern Issues

...directors Published in 2009 by: Australian Institute of Company Directors (AICD) Level 2 255 George Street Sydney NSW 2000 Telephone: (+61 2) 8248 6600 Facsimile: (+61 2) 8248 6633 www.companydirectors.com.au publications@companydirectors.com.au Auditing and Assurance Standards Board (AUASB) Level 7 600 Bourke Street Melbourne VIC 3000 Telephone: (+61 3) 8080 7400 Facsimile: (+61 3) 8080 7450 enquiries@auasb.gov.au www.auasb.gov.au © Australian Institute of Company Directors (AICD) © Auditing and Assurance Standards Board (AUASB) © Financial Reporting Council (UK) 2009. Portions of this publication have been adapted and reproduced from an Auditing Practices Board Bulletin: Going Concern Issues During the Current Economic Conditions (December 2008) with the kind permission of the Financial Reporting Council (UK). All rights reserved. For further information please visit www.frc.org.uk or telephone +44 (0)20 7492 2300. © Portions of this publication have been adapted and reproduced from a KPMG Flash Report: How Concerned Should Directors be with Going Concern? (February 2009) with the kind permission of KPMG. All rights reserved. Typeset by Endnote design Printed by Ligare Pty Ltd National Library of Australia Cataloguing-in-Publication entry Going Concern issues in financial reporting: a guide for companies and directors/AICD, AUASB ISBN 9781876604158 (pbk.). 9781876604172 (Electronic) 1. Going concern (Accounting). 2. Auditing–Australia. 3...

Words: 15500 - Pages: 62

Premium Essay

Quantitative Easing

...policy instruments that had never been used in previous economic recoveries. With interest rates near zero, the Fed undertook rounds of quantitative easing (QE), a non-standard policy, in an attempt to stimulate the economy and help bring the nation out of the recession. In this study, the theoretical model presented by Nasca (2011) will be expanded to show that price level can be stabilized when saving and the money supply increase in tandem, all else constant. Following the theoretical discussion, this study will then utilize an intertemporal model with heterogeneous agents to describe the U.S. economy in order to analyze factors affecting consumer saving decisions when QE policies are enacted following an economic crisis. The goal of this model is to show how the saving decision is affected by the enactment of QE in a crisis environment, given the lower prevailing interest rate scenario and elevated levels of economic instability. This study finds that the increase in saving rate observed in the unfavorable rate environment can potentially be attributed to the increased uncertainty in future income expectations and heightened levels of risk aversion that are characteristic of a post-crisis economy. This serves as a theoretical justification for why saving has risen during this stimulative period, thereby stabilizing price levels, as demonstrated empirically by Nasca (2011). Keywords: Decision-Making under Risk and Uncertainty, Inflation, Saving, Money Supply, Monetary Policy JEL...

Words: 13053 - Pages: 53

Premium Essay

Risk Assignment

...1 Quality Control Risk Definition: A speculative (possibility of a positive or negative outcome; not a “pure risk”) uncertainty associated with relying on the quality controls of outsourced supplier. Application: There is a risk that Bulldog Trailers Ltd may obtain inferior quality “extras” from suppliers , should the suppliers change their strategy in future and decide reduce their input costs to survive possible recessionary times. (NB: Made those words bold to show my understanding of how risk relates to an uncertainty) Bulldog Trailers Ltd has no quality control over the “extras” sourced from external suppliers. This is because the “extras” require specialised production technology that the company does not have. It will be difficult for Bulldog Trailers Ltd to verify that the “extras” have been built using consistent standards and specifications, despite the fact that the suppliers are “selected on the basis of quality”. Reputational Risk Definition: A speculative uncertainty that is associated with the public’s perception of a company because of quality controls around a product, service delivery and the overall customer experience. Application: There is a risk that Bulldog Trailers Ltd may have a tainted reputation as the result of the possibility of clients not being satisfied with the quality of the “extras”. The clients may spread the word about the poor quality of the “extras” and return the trailers for a full refund. Third party risk Definition: A pure...

Words: 1343 - Pages: 6

Free Essay

Quality Manager

...The Effects of Culture on International Banking Disclosures George Hooia* aGriffith University, Australia Abstract This paper investigates the influence of national culture on banking disclosures. Seventeen developed and developing countries with a representative sample of 37 listed domestic commercial banks were examined in 2004. Long-term orientation is found to be a non-significant cultural value with banking disclosures. The explanatory power for banking disclosures is found to be similar to the findings in Gray and Vint (1995) with a cross-section of industries. More importantly, this study recommends that long-term orientation should not be used as part of the cultural framework for disclosures due to bias data. Hence, Gray’s (1988) hypothesis on the secrecy / transparency dimension should be maintained with respect to the original four cultural values. JEL Classification: G21, M41, O57 Keywords: Culture, banking disclosures, transparency 1. Introduction The objective of this paper is to report on the empirical findings of the two research questions proposed by Hooi (2004) that may improve the Gray and Vint (1995) model of cultural influence on accounting disclosures. The first proposal was that extending the Gray and Vint study with the new inclusion of Hofstede and Bond’s (1988) cultural value of long-term orientation gives the opportunity to better understand the association between national culture and accounting disclosures. The second proposal...

Words: 7465 - Pages: 30

Free Essay

Azure

...order to find suitable countries one must find the countries on the Hofstede that score similar in all of the four dimensions to the United States scores. It is important to find two countries that are similar to the United States because, Azure Sky Tea wants to operate their office with the same cultures. 2. Classify possible combinations of countries for location of the Azure Sky Tea’s offices based on the Hofstede model. Include a discussion of the home country’s (U.S.) relative position on the Hofstede scales as compared to other countries. Note: Utilize the Hofsetede module to include all parameters (i.e., individualism, uncertainty, power distance, masculinity) for the classification. The Hofstede Model is a model that gives a score about the culture in terms of four dimensions such as, individualism, power distance, masculinity, and uncertainty avoidance index. A high power distance score indicates that people accept the difference in power between their superior and themselves and power is concentrated within the hands of a few individuals while a lower score indicates that people can’t take the difference in the score and power is well shared among the players in the system. Australia and Great Britain have similar scores to the United States. According to the Hofsetede in the power of distance Australia scored 36, Great Britain 35 and United States 40. Brazil and Argentina scored rather...

Words: 1078 - Pages: 5

Free Essay

Docx

...One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes a risk-free world of certainty; but the real world business is full of all sorts of risk and uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. The element of risk is associated with future which is indefinite and uncertain. To cope with future risk and uncertainty, the manager needs to predict the future event. The likely future event has to be given form and content in terms of projected course of variables, i.e. forecasting. Thus, business forecasting is an essential ingredient of corporate planning. Such forecasting enables the manager to minimize the element of risk and uncertainty. Demand forecasting is a specific type of business forecasting. Concepts of Forecasting: The manager can conceptualize the future in definite terms. If he is concerned with future event- its order, intensity and duration, he can predict the future. If he is concerned with the course of future variables- like demand, price or profit, he can project the future. Thus prediction and projection-both have reference to future; in fact, one supplements the other. Suppose, it is predicted that there will be inflation (event). To establish the nature of this event, one needs to consider the projected course of general price index (variable). Exactly in the same way, the predicted event of business recession...

Words: 823 - Pages: 4

Free Essay

Islamic Banking

...MODULE 1 ; ISLAMIC ECONOMIC SYSTEM LESSON 4 ; THE BASIC PROHIBITIONS EXPLAIN WHY RIBA AND GHARAR IS PROHIBITED IN ISLAMIC ECONOMIC SYSTEM , GIVING AND EXAMPLE . Technically RIBA includes all forms of income which is not earned by an individual { un earned income } it is not restricted to usury . Islam has categorically prohibited unearned income , for the sake of convenience we can only site the source of prohibition {QURAN 2:278-279}. Some scholars have gone on to distinguish between interest on load { RIBA AL NASIAH } and interest that is over and above {excessively } the load paid in kind { RIBA AL FADL} . The first type of RIBA is fixed in advance for waiting. SHARIAH wishes to extinguish all forms of exploitation , those with financial capital should not use their financial muscle to exploit the rest . Moreover SHARIAH wishes to eliminate all forms of unjust exchanges that may result in business transactions . In making trade permissible and making interest illegal Islam has put it clear that the two are different . the principle source of difference is the nature of profit gained from charge interest is different from the one gained from trading . The person in debt can not extinguish the burden unless he pays off the entire loan , as long as the loan or part of it still remains , the cumulative effect is to add on the interest charge...

Words: 1819 - Pages: 8

Premium Essay

Faithful Representation

... +27-11-559-2777 E-Mail dcoetsee@uj.ac.za A critical review of the trade-offs between the concepts of relevance and reliability in financial reporting |Abstract | |In an information orientated system of financial reporting the move from historical cost to fair value | |accounting has created numerous debates surrounding the trade-offs of the concepts of relevance and | |reliability. This article contributes to the debate by critically reviewing the current developments of | |these trade-offs to determine whether current financial reporting guidelines are appropriate to deal with | |the difficulties and uncertainties of financial reporting. The article found that the proposals of the joint| |framework discussion paper goes a long way in resolving the issues around the trade-offs of relevance and | |reliability. Changing the concept of reliability to faithful representation will not negatively impact on | |resolving the issues. Some recommendations are made to enhance the trade-off concepts. | Keywords: Faithful representation Financial reporting Framework Discussion Paper Qualitative characteristics Relevance Reliability 1. Introduction The current international move from historical cost to fair value accounting has...

Words: 6702 - Pages: 27