In 1–3 paragraphs for each question, answer the questions.

Alternatives and Models in Decision Making

· Question 1: The following table shows five opportunities to make a profit under three possible scenarios of the future. Select the best alternative based on the most probable future criterion.

Probability

0.3 F1 ($M = million)

0.2 F2 ($M = million)

0.5 F3 ($M = million)

Alternative 1

2 M

2 M

7.6 M

Alternative 2

-4 M

3.2 M

10.8 M

Alternative 3

0

3.6 M

10 M

Alternative 4

2.2 M

5.6 M

4 M

Alternative 5

8 M

1.8 M

3.6 M

· Question 2: The following table shows the payoffs in measures of utility (in utiles) for three alternatives and three states of nature.

State of Nature

S1

S2

S3

A1

100

160

160

A2

120

140

40

A3

180

60

120

Models for Economic Evaluation

· Question 1: You are financing a new car with a three-year loan at 10.5% annual nominal interest, compounded monthly. The price of the car is $14,500. Your down payment is $1,500. What are your monthly payments at 10.5%? (Assume your payments start one month after the purchase, or at the end of the first period.)

· Question 2: You decide that the maximum monthly home mortgage payment that you can afford is $930.00. You can make a $12,000 down payment, and annual interest rates are currently 7.5%. If you obtain a 30-year mortgage, what is the maximum purchase price that you can afford?

· Question 3: You have obtained a 25-year, $172,500 home mortgage at 8.8% annual interest. You anticipate that you will own the house for four years and then sell it, repaying the loan with a balloon payment. What will your balloon payment be?

· Question 4: If you deposit $2,000 in a savings account that pays 7.2% annual interest compounded annually and make no other deposits to the account, how long will it take for the account to grow to $3,000.

· Question 5: You opened an individual retirement account (IRA) on April 14, 2005 with, a deposit of $2,000. $80.00 is deducted from your paycheck, and you are paid twice a month The account pays 6.3% annual interest compounded semimonthly. How much will be in the account on April 14, 2020?

· Question 6: For each of the following investments, what is the accumulated amount?

· $16,000 at 7.2% compounded annually over 5 years.

· $100,000 at 10% compounded annually over 10 years.

· Question 7: Given a year-end series of receipts with the first year of $2,000 and increasing by 6% per year to year 20 with an interest rate of 6%, what is the present value?

· Question 8: There are two available design alternatives for a system. Each system has an expected future of this life cycle cost. The following table gives the costs for the corresponding three futures (in millions of dollars). The probability for the optimistic future is 30%, expected future is 50%, and a pessimistic future of 20%. Use an interest rate of 10% to select the best alternative. See attached Word Document