Bus 640

Jorge Escobar

ASHFORD UNIVERSITY

BUS 640: Managerial Economics February 25, 2013 John Sellers

1. PV = FV x [ 1 ÷ (1 + i)n ]

PV = $11mil x [ 1 ÷ (1 + 0.06)2 ]

PV = $11mil x [ 1 ÷ (1.06)2 ]

PV = $11mil x [ 1 ÷ 1.1236 ]

PV = $11mil x [ 0.88999644] ← PV factor

PV = $9,789,960.80
If I were chose between alternative 2 and the first $10min alternative I would go with alternative 1. It reflects a bigger present value than alternative with an opportunity interest rate of 6%.
PV = FV x [ 1 ÷ (1 + i)n ]

PV = $11mil x [ 1 ÷ (1 + 0.12)2 ]

PV = $11mil x [ 1 ÷ (1.12)2 ]

PV = $11mil x [ 1 ÷ 1.2544 ]

PV = $11mil x [ 0.79719388] ← PV factor

PV = $8,769,132.70
At an opportunity interest rate of 12% I would continue to choose alternative one and in fact, it would validate my decision to go with option 1.

2. Coefficient of variation = S.D./Mean
Protein Energy Drink = $40,000/$100,000 = 0.40 Chicken wing dipping sauce = $25,000/$60,000 = 0.42
Since the angel investor is looking for a risk adverse business their best option would be to go with business 1.
B) The Maximin Criterion is one where the decision maker chooses the best out of the two worst options in this scenario business 1 has a loss of $5K, while business to has a profit of $5K. Under the Maximin Criterion, the investor would choose business 2.
C) Considering the options presented don’t have a significant difference in potential deviation I would probably go with option 2 because it has a lower start up cost and slightly higher risk. Considering my age, I tend to be a risk