do fast i will 5 upvotes. The economy begins in long-run equilibrium. Then one day, the president appoints a new Fed chair, who is well known for holding the view thatinflation is not a major problem for an economy.Note: You will not be graded on any changes you make to the following graph, but you may use it to help you understand the scenario described.Price LevelLRASQuantity of OutputAggregate SupplyAggregate DemandAggregate DemandAggregate SupplyLRAS(?)

Answered: The economy begins in long-run…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter8: Evolutionary Solver: An Alternative Optimization Procedure

Section8.7: Portfolio Optimization

Problem 13P

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A project does not necessarily have a unique IRR. (Refer to the previous problem for more information on IRR.) Show that a project with the following cash flows has two IRRs: year 1, 20; year 2, 82; year 3, 60; year 4, 2. (Note: It can be shown that if the cash flow of a project changes sign only once, the project is guaranteed to have a unique IRR.)
It is January 1 of year 0, and Merck is trying to determine whether to continue development of a new drug. The following information is relevant. You can assume that all cash flows occur at the ends of the respective years. Clinical trials (the trials where the drug is tested on humans) are equally likely to be completed in year 1 or 2. There is an 80% chance that clinical trials will succeed. If these trials fail, the FDA will not allow the drug to be marketed. The cost of clinical trials is assumed to follow a triangular distribution with best case 100 million, most likely case 150 million, and worst case 250 million. Clinical trial costs are incurred at the end of the year clinical trials are completed. If clinical trials succeed, the drug will be sold for five years, earning a profit of 6 per unit sold. If clinical trials succeed, a plant will be built during the same year trials are completed. The cost of the plant is assumed to follow a triangular distribution with best case 1 billion, most likely case 1.5 billion, and worst case 2.5 billion. The plant cost will be depreciated on a straight-line basis during the five years of sales. Sales begin the year after successful clinical trials. Of course, if the clinical trials fail, there are no sales. During the first year of sales, Merck believe sales will be between 100 million and 200 million units. Sales of 140 million units are assumed to be three times as likely as sales of 120 million units, and sales of 160 million units are assumed to be twice as likely as sales of 120 million units. Merck assumes that for years 2 to 5 that the drug is on the market, the growth rate will be the same each year. The annual growth in sales will be between 5% and 15%. There is a 25% chance that the annual growth will be 7% or less, a 50% chance that it will be 9% or less, and a 75% chance that it will be 12% or less. Cash flows are discounted 15% per year, and the tax rate is 40%. Use simulation to model Mercks situation. Based on the simulation output, would you recommend that Merck continue developing? Explain your reasoning. What are the three key drivers of the projects NPV? (Hint: The way the uncertainty about the first year sales is stated suggests using the General distribution, implemented with the RISKGENERAL function. Similarly, the way the uncertainty about the annual growth rate is stated suggests using the Cumul distribution, implemented with the RISKCUMUL function. Look these functions up in @RISKs online help.)
In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset. Consider the following simple derivative. A stocks current price is 80 per share. You purchase a derivative whose value to you becomes known a month from now. Specifically, let P be the price of the stock in a month. If P is between 75 and 85, the derivative is worth nothing to you. If P is less than 75, the derivative results in a loss of 100(75-P) dollars to you. (The factor of 100 is because many derivatives involve 100 shares.) If P is greater than 85, the derivative results in a gain of 100(P-85) dollars to you. Assume that the distribution of the change in the stock price from now to a month from now is normally distributed with mean 1 and standard deviation 8. Let EMV be the expected gain/loss from this derivative. It is a weighted average of all the possible losses and gains, weighted by their likelihoods. (Of course, any loss should be expressed as a negative number. For example, a loss of 1500 should be expressed as -1500.) Unfortunately, this is a difficult probability calculation, but EMV can be estimated by an @RISK simulation. Perform this simulation with at least 1000 iterations. What is your best estimate of EMV?
A company manufacturers a product in the United States and sells it in England. The unit cost of manufacturing is 50. The current exchange rate (dollars per pound) is 1.221. The demand function, which indicates how many units the company can sell in England as a function of price (in pounds) is of the power type, with constant 27556759 and exponent 2.4. a. Develop a model for the companys profit (in dollars) as a function of the price it charges (in pounds). Then use a data table to find the profit-maximizing price to the nearest pound. b. If the exchange rate varies from its current value, does the profit-maximizing price increase or decrease? Does the maximum profit increase or decrease?
The IRR is the discount rate r that makes a project have an NPV of 0. You can find IRR in Excel with the built-in IRR function, using the syntax =IRR(range of cash flows). However, it can be tricky. In fact, if the IRR is not near 10%, this function might not find an answer, and you would get an error message. Then you must try the syntax =IRR(range of cash flows, guess), where guess" is your best guess for the IRR. It is best to try a range of guesses (say, 90% to 100%). Find the IRR of the project described in Problem 34. 34. Consider a project with the following cash flows: year 1, 400; year 2, 200; year 3, 600; year 4, 900; year 5, 1000; year 6, 250; year 7, 230. Assume a discount rate of 15% per year. a. Find the projects NPV if cash flows occur at the ends of the respective years. b. Find the projects NPV if cash flows occur at the beginnings of the respective years. c. Find the projects NPV if cash flows occur at the middles of the respective years.

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