10 ModelHW10

# 10 ModelHW10 - Buying a patent Cost: \$8,000,000 Demand...

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Buying a patent Cost: \$8,000,000 i= 12% Demand Return/yr # years p (P/A,12%,n) NPW NPW/Prob. Light \$1,300,000 3 0.2 2.4 -\$4,877,660 -\$975,532 Medium \$2,500,000 4 0.4 3.04 -\$406,750 -\$162,700 Heavy \$4,000,000 4 0.4 3.04 \$4,149,200 \$1,659,680 E[NPW]= \$521,448 Expected NPW The expected present worth is \$500,000. (Rounded) Based on E[NPW], the company should make the investment. There is a significant question of probability estimates - whether or not this investment should be made.

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. A slight change in probabilities alters the result to no-go.
Factory outlet store Cost: \$500,000 MARR= 12% Tax= 40% Salvage= \$100,000 after 15 years NPW values taken from 14.24low, 14.24average, and 14.24high spreadsheets, computed at 15% Weighted NPW w/ Demand Return/yr NPW p Weighted NPW (NPW-E[NPW])^2 (NPW-E[NPW])^2 perfect info Low -\$80,000 -\$728,000 0.3 -\$218,400 1.70E+12 5.09E+11 0 Average \$500,000 \$1,307,000 0.4 \$522,800 5.22E+11 2.09E+11 \$1,307,000 High \$1,000,000 \$3,061,000 0.3 \$918,300 4.96E+10 1.49E+10 \$3,061,000 E[NPW]= \$1,222,700 Var[NPW]= 7.33E+11 E[NPW]w/info= sigma= \$856,099 EVPI= a) If store is open 15 years, should I open it? How much would I pay to know true state of nature? Based on these results, the outlet store should be opened. There is an expected NPW of \$1,223,000 from opening the store. There is also a 70% probability of having a positive NPW. I would be willing to pay \$218,400 to know the true state of nature. This is the weighted NPW of the loss in low demand, which I would save by not opening the store in a period of low demand. b) Market survey available for \$1000. Determine strategy that maximizes expected payoff after survey. Compute new EVPI.

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## 10 ModelHW10 - Buying a patent Cost: \$8,000,000 Demand...

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