PS1 - IEOR UC Berkeley Dr Donatella Taurasi Principles of Engineering Economics Problem Set 1 You may submit your solution to the homework as an

# PS1 - IEOR UC Berkeley Dr Donatella Taurasi Principles of...

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IEOR UC Berkeley Dr. Donatella Taurasi Principles of Engineering Economics Problem Set 1 You may submit your solution to the homework as an excel/word file or you may write out your solutions by hand and submit a scanned pdf. Your solutions must be clearly commented and formulas should be explained. Rows and columns should be clearly labeled. Final answers should be indicated by highlighted text and/or boxes. Hand in one solution per group with each group member’s name clearly marked ( EXACTLY as their name appear in bCourses).If a team uploads more than one solution per team, or writes down the wrong names, the whole team will be heavily penalized . Solutions should be the independent work of your group and you may discuss the problems only with members of your group. Answers must be submitted via the course webpage before class . No late assignments will be accepted. Problem 1: Endowment Losses. An American university endowment has experienced severe losses over the past year. The value of the university’s endowment is \$1B as of today (t=0). The interest rate (i.e. the expected annual investment return on the endowment) is r = 7%. (a) What amount can the university spend from the endowment at t=1 if it would like the amount spent to grow by g=4% per year from then on and has no other resources than the endowment? (b) The planned spending is, however, much larger. Back when things looked better, the university set up plans to spend C=\$40M at t=1, with future spending growing by g=4% per year. What is the PV of the planned spending? How large is the shortfall between the PV of the planned spending and the value of the endowment? (c) The university president approaches the university’s business school for innovative ideas for how to cover the shortfall to avoid having to cut spending. The business school suggests that the university sets up a campus in Abu Dhabi and negotiates the following deal: Abu Dhabi will pay the university \$200M today (t=0) for the right to name the campus after the famed university for the next 12 years (i.e. up to t=12) and have classes taught by professors from the

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