QUIZ_04_022508_sol

# QUIZ_04_022508_sol - Option A Expected production cost(in...

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ISE310 Spring 2008 Session 11 02/25/08 Quiz 04 Name_______________________ Please do all your work on this paper. I have a choice two locations for my next facility. Location A has a projected construction cost of \$30,000,000 with a probability of .8, and a construction cost of \$35,000,000 with a probability of .2. The estimated annual profit at this location has a 40% chance of being \$10,000,000 and a 60 % chance of \$12,000,000. The life of the project is 5 years. The data for location B are \$40,000 with a probability of 0.7, \$43,000,000 with a probability of .3. Profit of \$13,000,000 with a probability of 0.3, \$15,000,000 with a probability of 0.7. At a discount rate of 10%, which location would you choose?
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Unformatted text preview: Option A Expected production cost (in \$M) = 0.8(30)+0.2(35) = 31 Expected annual profit = .4(10) + .6(12) = 11.2 Present value of the profit = 11.2 (1/1.1+1/1.1^2+1/1.1^3+1/1.1^4+1/1.1^5) = \$42.46 Net present value or worth of location A = \$11.46M Option B Expected production cost (in \$M) = 0.7(40)+0.3(43) = 40.9 Expected annual profit = .3(13) + .7(15) = 14.4 Present value of the profit = 14.4 (1/1.1+1/1.1^2+1/1.1^3+1/1.1^4+1/1.1^5) = \$54.59 Net present value or worth of location A = \$13.69M Option B is better. Both are excellent as they exceed the discount rate substantially? How would you determine the actual rate of return?...
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