MT1_SP06_solution - ISE 310L GEZA BOTTLIK MIDTERM No 1...

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ISE 310L Spring 2006 GEZA BOTTLIK MIDTERM No. 1 Solution 03/04/06 Problem No. 1 We would like to decide between two potentially profitable short term investments in our manufacturing operations. Investments are made in year zero and profits are in years 1 and 2 (15 points) The discount rate is either 15% or 20% with probabilities of 25 and 75% respectively in each of the two years. One investment has a one time cost of $40,000 and yields income of $30,000 per year for two years. The other costs $40,000 and yields $30,000 per year for the same two years. Which of the two do you prefer and why? (Show your work) Setting up clearly for one investment is sufficient – you do not need to solve. Many of you ignored the above advice and did a lot more work than necessary. Page 1 of 6
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ISE 310L Spring 2006 GEZA BOTTLIK MIDTERM No. 1 Solution 03/04/06 Problem No. 3 Page 3 of 6
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ISE 310L Spring 2006 GEZA BOTTLIK MIDTERM No. 1 Solution 03/04/06 A group of investor has decided to go into the business of distributing products. They have
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