- Submitted By: Krystal-Brooking
- Date Submitted: 05/30/2016 8:22 AM
- Category: Miscellaneous
- Words: 919
- Page: 4

Risk and Uncertainty

Crystal Rugg

BUS 640: Managerial Economics

Professor Sidney Okolo

May 17, 2016

Question 1

In order to find out the better deal between the second alternative at an 8% interest rate versus a 12% interest rate, we will need to calculate the present value as well as the given interest rates. To do this we use the following calculation formula:

Present Value (PV) Formula: FVn = PV (1+r)

The FVn = Future Value with n being number of years

Discount Factor formulation: 1/(1+r) n

The following graph has been made to show these calculations:

Year

Option 1

Int. Rate (8%)

PV

Option 2

Int. Rate (12%)

PV

0

0

0

1

7 mil.

0.9259

$6,481,481

7 mil.

0.8929

$6,250,000

2

7 mil.

0.8573

$6,001,372

7 mil.

0.7972

$5,580,357

Total

14 mil.

$12,482,853

14 mil.

$11,830,357

Show Work:

7000000(n=1) = (1+.08) 1 = discount factor = 0.9259 Present Value = $6,481,481

7000000(n=2) = (1+.08) 2 = discount factor = 0.8573 Present Value = $6,001,372

7000000(n=1) = (1+.12) 1 = discount factor = 0.8929 Present Value = $6,250,000

7000000(n=2) = (1+.12) 2 = discount factor = 0.7972 Present Value = $5,580,357

Option 1 PV minus Option 2 PV Total = $652,496

Based on the above calculations, the present value for the second alternative at an 8% interest rate is a total of $12,482,853. The present value for the second alternative at a 12% interest rate is a total of $11,830,357. In summing up these present values we find that option 2 at a 12% interest rate, being $652,496 cheaper in present value terms, offers the better deal.

There are many real life scenarios in which these calculations would be necessary. To provide an example, a business man wants to provide funding for a community development and offers 2 ways in which he will do this. Option 1 would be a lump sum payment up front of 50 million dollars with no interest or...

- BUS 640 Week 1 Economics of Risk and Uncertainty Applied Problem
- BUS 640 Week 1 Assignment Economics of Risk and Uncertainty Applied Problems (NEW)
- Decisions of Uncertainty
- A Decision of Uncertainty
- Coping with Uncertainty
- Responding to Uncertainty in the Environment
- The Fear of Death and Uncertainty
- The Problem of Evil: Uncertainty of the World
- Decision Making with Uncertainty
- Risks