Topic $2$ Chapter $2$ Elements of Decision Problems

$2\mathrm{.}1$ Imagine the difficulties of an employer whose decision context is choosing a new employee

from a set of applicants he will interview. What do you think the employer's objectives should

be$?$ Identify the employer's specific decisions and uncertainties and describe the relevant

uncertain events. How does the problem change if the employer has to decide whether to

make an offer on the spot after each interview?

$2\mathrm{.}2$ Describe a decision problem you have faced recently $($or with which you are currently

struggling$).$ Describe the decision context and your objectives. What were the specific

decisions that you faced, and what were the relevant uncertainties? Describe the possible

consequences.

$2\mathrm{.}3$ Find the net present value of a project with cashflows of $-$$$12,000$ in Year $1,+$$$5000$ in Years

$2$ and $3,-$$$2000$ in Year $4,$ and $+$$$6000$ in Years $5$ and $6.$ Use an interest rate of $12\%.$ Find

the interest rate that gives a net present value of zero.

$2\mathrm{.}4$ A friend asks you for a loan of $$1000$ and offers to pay you back at the rate of $$90$ per month

for $12$ months.

a$.$ Using an annual interest rate of $10\%,$ find the net present value $($to you$)$ of loaning your

friend the money. Repeat, using an interest rate of $20\%.$

b$.$ Find an interest rate that gives a net present value of $0.$ The interest rate for which NPV

$=0$ is often called the internal rate of return.