113 review questions copy

11 12 d b 10 13 a the continuation payoff for option

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Unformatted text preview: 1. 12. D B 10 13. A The continuation payoff for Option 1 is simply -$100m (the cancellation fee). The continuation payoff for Option 2 is $200m - $400 = -$200. Option 1 is better. Note that the earlier non-refundable payments of $150m are sunk, and so are irrelevant to the continuation decision. 14. 15. C B The benefits of continuing are $800m. The costs of continuing are the additional $500m needed plus the $200m that could be recovered from earlier investments if the games are cancelled. Thus, the continuation payoff is $800m – ($500m + $200m) = $100m. 16. A With perfect foresight the province would have estimated the benefits at $800 and the costs at ($500m + $500m), for a net benefit of -$200m. 17. B 18. We should complete the games despite the fact that we would never have started them had we known then what we know now. The sunk costs ($300m) already incurred cannot be undone no matter what we do. A If the entire $500m already spent can be recovered if we cancel then this becomes an opportunity cost of proceeding. Thus, the c...
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