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Delta Manufacturing Corp. is considering the introduction of a new product. The possible levels of unit sales and the probabilities of their...
1. Delta Manufacturing Corp. is considering the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are as follow:
Possible Market Reaction Unit Sales Probabilities
Low response 20 .10
Moderate response 40 .30
High response 60 .40
Very high response 90 .20
Find (1) the expected value (average) of the unit sales for the new product; (2) the standard deviation of unit sales.
2. Possible outcomes and the probabilities of their occurrence are shown below for three different investment alternatives. Rank the three alternatives in terms of their risk using the coefficient of variation as the criterion.
Alternative 1 Alternative 2 Alternative 3
Outcome Probability Outcome Probability Outcome Probability
Failure 50 .2 90 .3 70 .4
Acceptable 70 .4 160 .5 210 .5
Successful 100 .4 200 .2 400 .1
3. Marisol Mercantile can make only one investment so it wants to be sure that it chooses wisely. It can invest in Property A, which will cost $2,000,000 and will return $400,000 per year in years 5 through 10 and $500,000 in years 11 through 20. Property B will cost $2,500,000 and return $300,000 per year for the next 20 years. The cost of capital is 10%. Find which of the two investments Marisol Mercantile should make. (Note: You will be working with a deferred annuity for Property A. Years 5 -10 represent 6 years and years 11 - 20 represent 10 years.)
