MGT 5064 Week 1 Assignment 7

MGT 5064 Week 1 Assignment  7 | Florida Institute Of Technology  | Assignment Help 

Chapter 7Dealing with Uncertainty, Expected Values, and Sensitivity Analysis

Refer to Chapter 7 to the notes/ PowerPoint slides on CANVAS under ‘Files’ for Chapter 7) and view the class lecture video (“Lecture on Chapter 7 + Assignment Procedure”).  Also watch the solutions video for this homework (Solutions to Chapter 7 assignment…), then answer the following questions completely:

1.      (8 points) The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever, a perpetuity) is $425 million. The annual net benefits will depend on the amount of rainfall: $18 million in a “dry” year, $29 million in a “wet” year, and $52 million in a “flood” year.  Meteorological records indicate that over the last 100 years there have been 86 “dry” years, 12 “wet” years, and 2 “flood” years.  Assume the annual benefits, measured in real dollars, begin to accrue at the end of the first year.  Using the meteorological records as a basis for prediction, what are the net benefits of the dam if the real discount rate is 5 percent? Does the dam pass the net benefits test?

2.      (7 points) Use several alternative discount rate values (1% to 10%) to investigate the sensitivity of the present value of net benefits of the dam in exercise (1) to the assumed value of the real discount rate. Determine the "breakeven" value of the discount rate, which can be found by solving for the rate at which the present value of the stream of expected annual net benefits just equals the cost of construction.

3.      (20 points) Instructor-provided worksheet is recommended.

New City is considering building a recreation center.  The estimated construction cost is $12 million with annual staffing and maintenance costs of $750,000 over the twenty year life of the project.  At the end of the life of the project, New City expects to be able to sell the land for $4 million, though the amount could be as low as $2 million and as high as $5 million.  Analysts estimate the first year benefits (accruing at the end of the year of the first year) to be $1.2 million.  They expect the annual benefit to grow in real terms due to increases in population and income.  Their prediction is a growth rate of 4 percent, but it could be as low as 1 percent and as high as 6 percent.  Analysts estimate the real discount rate for New City to be 6 percent, though they acknowledge that it could be a percentage point higher or lower.       

                        is considering building a teceis recommended.

                        nsitivity Analysising and selling the stent to cardiologists.

                         costs now that thea. Calculate the present value of net benefits for the project using the analysts’ predictions.

b. Investigate the sensitivity of the present value of net benefits to alternative predictions within the ranges given by the analysts.

Submit a copy of your Excel spreadsheet for problem 3 showing the present value of net benefits for the project (part a). For part b, you can vary the assumed values for the scrap value of land ($2 M to $5M), growth rate of benefits (0.01 to 0.06) and discount rate (0.05 to 0.07) as an exercise but submit your results for the best-case analysis and the worst-case analysis.

All work must be typed using Times New Roman or Calibri, 12 points font and must be submitted in MS Word;Your file name should be YOURLASTNAME_YOURFIRSTNAME_Homework 9.docSubmit/ upload your answers as an attachment using the CANVAS setting for Homework 9.