Problem #1 (16)
The ABC corporation is interested in purchasing a small manufacturing firm (making car seats). An
initial Investment of $15 million is required. Let us assume that the sale price of the car seat is normally
distributed with a mean of $65, and standard deviation of $4.00 per unit. Also we assume that the sales
volume is governed by the following empirical distribution
Yearly Sales Volume (in 1000)
Probability
-----------------------------------------------------------90 120
0.25
120 -- 150
0.47
150 180
0.28
The cost (of production) is uniformly distributed between $20-$50. We want to accurately estimate the
yearly net cash flow assuming a corporate (composite )tax rate (T) which is 45% now but there is a
60% Probability that it will jump to 55% starting next year. Use the following notations and equations to
the questions asked (See what is required below).
Notations:
YCF = Annual cash Flow, R = annual Revenue, C = annual cost ,
PC = production cost per unit, T = annual tax, F= corporate tax rate,
P= Sale Price per unit, V= sales volume
Equations:
SCF = R-C-T,
R=P * V, C = PC * V , T= F * (R-C-D) where D= depreciation per year. Use
straight line depreciation for n=15 years
What is required:
Assume D=depreciation (linear deprecistion for 10 years), develop the simulation mode, run it 60
times and determine:
1). The expected value (mean) of the yearly cash flow
2). Determine the limits of corresponding to a 98% confidence level. (where is
the true mean yearly cash flow)
3). If a yearly cash flow of less than of the above average (determined in part 1) is considered a Total
Loss, determine the probability that the company will be in Total Loss situation.

Problem #2 (16Points):
A nuclear power company is deciding whether or not to build a power plant at city D or city R.
The cost of building the power plant is $10 million at city D and $20 Million at city C. IF the company
builds at city D, however, and an earthquake occurs (at that city) during the next 5 years, construction
will be terminated and the company will loose $10 million.(and will still have to build at city C). The
company, from historical data, believes that there is 20% chance that an earthquake will occur in city D
during the next 5 years. For $1 million, a geologist can be hired to analyze the fault structure in City
D. He will either predict that an earthquake will occur or will not occur. The geologists past record
indicates that he will predict an earthquake on 95% of the occasions for which an earthquake will occur.
He will also predict no earthquake on 90% of the occasions for which an earthquake will not occur. Use
this information and answer the following questions:
a). develop the decision tree of the situation. (Make sure the Tree has all the relevant
information on it)
b)- Determine Pr( the geologist will say Earthquake)
c)- Should the power plant hire the geologist.
D). What is the least attractive alternative available for the company now.

Problem #3. (18 Poimts)
The Nestle Financial Services Company, is considering investing $20 million in stock market. The
company uses regression analysis to predict the market condition for the next 12 months before
determining to invest in stock or the alternative, invest in Bonds and CDs ( with only 2.5% fixed and
sure return/year). They have decided that The United States stock market index (Y) fluctuations is
related to a number of overseas market indexes, including, European Market Index (X1), Asian Market
index (X2), Far East market index (X3), and South American market index. For the past 10 years, the
average semiannual market index are available and are presented in the following table.
Year
1

3
4
5
6
7
8
9
10

X1
35
31
45
60
75
60
50
38
27
38
61
32
73
66
74
65
80
84
64

X2
24
21
24
25
24
25
25
23
26
25
23
24
27
27
23
25
25
25
28

X3
91
90
88
87
88
91
90
89
79
89
91
87
92
95
89
91
87
86
98

X4
100
95
110
88
110
105
100
98
112
87
98
101
109
102
103
94
97
96
85

316

2

Y
240
236
270
274
267
276
288
281
245
256
275
232
310
306
268
301
300
296
307

72

26

99

99

A). Determine the relationship between Y and X1, X2,X4. Interpret the resulting equation
B). Test the significance of regression coefficients using =0.05
C). Determine a 95% confidence interval for mean value of Y when X1=75, X2= 24, X3 = 90, and
X4=104
D). It is estimated that, Total gain in value of stock (in one year) is determined from the equation:
Yearly gain = (Y-280)/10 ) * 1.05 Million. If the condition stated in part C above represent the
Estimate for the index for the next year, should the company invest in stock or buy bond and
realize a
rate of return of 2.5%. . At that point, what is the probability that buying stock will be more
profitable
than the alternative (ie., buying Bond & CDs).

Problem #4 (16 Points)
Oilco must decide whether or not to drill for oil in the South China sea or not. It cost $100000 and if Oil
is discovered , its value is estimated to be $600000. Oilco believes there is a 45% chance that the field
contain oil. Before making decision on drilling, Oilco can hire (for $10000) a consultant to obtain more
information about the likelihood that the field contain oil.
There is Y % chance that the consultant will issue a favorable report (saying there is oil). Given a
favorable report, there is 80% chance that the field contain oil. Given an unfavorable report, there is
There is only w % chance that the field contains Oil.
1) Assuming Y=50% and W= 10%, Determine Oilcos Optimum course of action.

2) the historical information shows that ; Y >30 , and W <25. Conduct a sensitivity analysis, graph a
tornado (type) diagram and interpret the results (best course of action under different conditions)