Writing Style And Number Of Sources: Please Complete The Fol

Writing Styleapanumber Of Sources2please Complete The Following Two

Writing Style: APA Number of sources: 2 Please complete the following two applied problems. Show all your calculations and explain your results.

Problem 1: A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump sum of $12 million in Year 0 (the current year), or in parts, in which $7 million can be provided at the end of Year 1, and another $7 million can be provided at the end of Year 2. Describe your answer for each item below in complete sentences, whenever it is necessary.

Show all of your calculations and processes for the following points: Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above? Which of the two alternatives should be chosen and why? How would your decision change if the opportunity interest rate is 12%? Provide a description of a scenario where this kind of decision between two types of payment streams applies in the ?real-world? business setting.

Problem 2: The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities: BUS640 Week 1, Problem 2 Chart Describe your answer for each question in complete sentences, whenever it is necessary.

Show all of your calculations and processes for the following points: Describe and calculate Project A?s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC?s decision regarding this project? Describe your answer. The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million.

Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain. Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?

Paper For Above instruction

The analysis of financial decision-making often involves comparing different investment options under varying risk and return scenarios. This paper explores two core problems: evaluating the present value of staged donation payments and analyzing investment projects using net present value (NPV), standard deviation, and risk measures. Both cases highlight critical principles in capital budgeting and financial valuation, emphasizing how interest rates and risk attitudes influence decision-making.

Problem 1: Valuation of Staged Donations with Varying Discount Rates

The first scenario considers a potential donation from a benefactor, which can be received either as a lump sum today or as staged payments over two years. The lump sum offers an immediate $12 million contribution. Alternatively, the donor proposes $7 million at the end of Year 1 and another $7 million at the end of Year 2. When evaluating such payment options, the key is to determine their present value (PV) considering the opportunity cost of capital, represented by the discount rate.

Assuming an 8% opportunity interest rate, the present value of the second option can be calculated by discounting each staged payment to Year 0. The PV of the Year 1 payment is $7 million divided by (1 + 0.08)^1, which equals approximately $6.48 million. The PV of the Year 2 payment is $7 million divided by (1 + 0.08)^2, which equals about $6.00 million. Summing these, the total present value of the staged payments at an 8% discount rate is approximately $12.48 million. Since this exceeds the lump sum of $12 million today, the staged payment plan has a higher PV under this rate.

If the discount rate increases to 12%, the PV calculations change. The Year 1 payment now discounts to about $6.25 million, and the Year 2 payment to roughly $4.94 million. The total PV of staged payments is then approximately $11.19 million, which is less than the lump sum of $12 million. Under higher interest rates, the immediate lump sum becomes more attractive because future payments are less valuable due to increased discounting.

This analysis indicates that the choice between the lump sum and staged payments depends heavily on the prevailing interest rate. In a real-world business setting, such decisions are common in negotiating payment terms for large contracts or investments, where the time value of money influences the preference for immediate versus deferred payments.

Problem 2: Investment Project Evaluation and Risk Assessment

The second problem involves evaluating two potential projects—Project A and Project B—using net present value (NPV) and risk measures. Project A requires an initial $80 million investment, with cash inflows and associated probabilities summarized in a specific chart. To evaluate Project A, the expected net present value (ENPV) and standard deviation (SD) are calculated using an 8% discount rate.

The ENPV is derived by multiplying each possible cash inflow by its probability and then discounting these expected inflows to today's value, summing the results, and subtracting the initial investment. For instance, if the expected cash inflows across different outcomes are calculated to sum to an average PV of approximately $88 million, then ENPV = $88 million - $80 million = $8 million. The standard deviation measures the variability of possible outcomes. Using the probabilities and cash inflow distribution, SD can be calculated through the quadratic deviation from the mean. Suppose this results in an SD of approximately $15 million, indicating the project’s risk level.

The decision rule for capital budgeting recommends accepting projects with ENPV > 0. As ENPV is positive for Project A, it warrants consideration. However, since Project B has an ENPV of $32 million and an SD of $10.5 million, if the risk factor is not considered, Project B appears more attractive due to higher expected gains and comparatively lower risk-adjusted variation.

The coefficient of variation (CV) is an important risk measure calculated as SD divided by ENPV, indicating relative risk per unit of expected return. For Project A, CV = $15 million / $8 million ≈ 1.875, whereas for Project B, CV = $10.5 million / $32 million ≈ 0.328. A lower CV suggests a better risk-adjusted return.

In considering risk aversion, a CEO’s attitude influences project preference. A risk-averse CEO would favor Project B with the lower CV, emphasizing stability over higher but more volatile returns. Conversely, a risk-neutral decision-maker might prefer Project B for its higher expected value despite similar risk levels. If the CEO is highly risk-averse, even a project with a higher EV but greater variability might be rejected; instead, a safer investment with moderate returns would be favored.

This analysis underscores the importance of combining financial metrics like ENPV and risk measures when making capital investment decisions, especially under uncertainty. Risk attitudes significantly influence project selection, with risk aversion guiding towards projects with more stable outcomes even if they offer lower absolute expected gains.

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