Economics Risk Assignment
Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above?
Which of the two alternatives should be chosen and why?
How would your decision change if the opportunity interest rate is 12%? If the interest rate was 12% INSTEAD OF 8%.
Provide a description of a scenario where this kind of decision between two types of payment streams applies in the “real-world” business setting.
Describe and calculate Project A’s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC’s decision regarding this project? Describe your answer.
The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain.
Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider
your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?