# Question

Refer to the financial risk analysis example presented in Sec. 28.4, including its results shown in Fig. 28.15. Think-Big management is quite concerned about the risk profile for the proposal. Two statistics are causing particular concern. One is that there is nearly a 20 percent chance of losing money (a negative NPV). Second, there is more than a 6 percent chance of losing more than half ($10 million) as much as the mean gain ($18 million). Therefore, management is wondering whether it would be more prudent to go ahead with just one of the two projects. Thus, in addition to option 1 (the proposal), option 2 is to take a 16.50 percent share of the hotel project only (so no participation in the shopping center project), and option 3 is to take a 13.11 percent share of the shopping center only (so no participation in the hotel project). Management wants to choose one of the three options. Risk profiles now are needed to evaluate the latter two.

In problem 28.4 & 28.5

(a) Estimate the mean NPV and the probability that the NPV will be greater than 0 for option 2 after performing a simulation with 1,000 trials for this option.

(b) Repeat part a for option 3.

(c) Suppose you were the CEO of the Think-Big Development Co. Use the results in Fig. 28.15 for option 1 along with the corresponding results obtained for the other two options as the basis for a managerial decision on which of the three options to choose. Justify your answer.

In problem 28.4 & 28.5

(a) Estimate the mean NPV and the probability that the NPV will be greater than 0 for option 2 after performing a simulation with 1,000 trials for this option.

(b) Repeat part a for option 3.

(c) Suppose you were the CEO of the Think-Big Development Co. Use the results in Fig. 28.15 for option 1 along with the corresponding results obtained for the other two options as the basis for a managerial decision on which of the three options to choose. Justify your answer.

## Answer to relevant Questions

Read the referenced article that fully describes the OR study summarized in the application vignette presented in Sec. 1.4. List the various financial and nonfinancial benefits that resulted from this study. Susan is a ticket scalper. She buys tickets for Los Angeles Lakers games before the beginning of the season for $100 each. Since the games all sell out, Susan is able to sell the tickets for $150 on game day. Tickets that ...A transition matrix P is said to be doubly stochastic if the sum over each column equals 1; that is, If such a chain is irreducible, a periodic, and consists of M + 1 state, show that A computer is inspected at the end of every hour. It is found to be either working (up) or failed (down). If the computer is found to be up, the probability of its remaining up for the next hour is 0.95. If it is down, the ...Reconsider the example presented at the end of Sec. 29.8. Suppose now that a third machine, identical to the first two, has been added to the shop. The one maintenance person still must maintain all the machines. (a) Develop ...Post your question

0