Assume that you are a risk adverse investor considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities are as follows:
Asset A
P(x) K
0.05 4%
0.15 6
0.25 8
0.30 9
0.25 8
Asset B
P(x) K
0.05 5%
0.15 5
0.25 7
0.30 8
0.25 9
Which asset should be preferred and why?
Assume that you are a risk adverse investor considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities are as follows:
Asset A
P(x) K
0.05 4%
0.15 6
0.25 8
0.30 9
0.25 8
Asset B
P(x) K
0.05 5%
0.15 5
0.25 7
0.30 8
0.25 9
Which asset should be preferred and why?
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Related questions
Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year's after tax cash flow is given in the table below.
| Investment B | Investment C | |||
| Probability | After Tax | Probability | After Tax | |
| 0.25 | $20,000 | 0.30 | $22,000 | |
| 0.50 | 32,000 | 0.50 | 40,000 | |
| 0.25 | 40,000 | 0.20 | 50,000 | |
What is the expected value of each projectâs annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.
Please provide the average accounting profit and average economic profit with the answer. Thank you!
Delta Blue Airlines operates a commuter flight. The plane holds 30 passengers in Economy and 6 passengers in First Class. The airline makes a $100 profit on each passenger in Economy and $200 per passenger in First Class. When Delta Blue takes 30 Economy reservations and 6 First Class for the flight, on average, two passengers do not show up for each class. As a result, Delta is averaging 28 Economy passengers and 4 First Class passengers with a profit of 28*$100 + 4*$200 = $3600 per flight. The airline operations office has asked for an evaluation of an overbooking strategy where they would accept 32 Economy reservations and up to 8 First Class reservations even though the airplane holds only 30 Economy and 6 First class passengers. The probability distribution for the number of passengers showing up with the new overbooking reservations policy is as follows:
| # of Passengers Showing up For Economy | Probability |
| 28 | 0.05 |
| 29 | 0.25 |
| 30 | 0.50 |
| 31 | 0.15 |
| 32 | 0.05 |
| # of Passengers Showing up For First Class | Probability |
| 1 | 0.02 |
| 2 | 0.06 |
| 3 | 0.17 |
| 4 | 0.20 |
| 5 | 0.25 |
| 6 | 0.23 |
| 7 | 0.05 |
| 8 | 0.02 |
The airline will incur a cost for any passenger denied seating on the flight. This cost covers added expenses of rescheduling the passenger as well as loss of goodwill, estimated to be $150 per Economy passenger and $300 per First Class passenger. On the other hand, if there are First Class seats available, they move up Economy passengers to First Class. When this happens, they believe there is a positive goodwill âcostâ of $200. Build a simulation model in an Excel file that will model the performance of the overbooking system. Model 500 flights. And answer the following questions.
What is the mean profit per flight if overbooking is implemented?
What percentage of customers will experience an overbooking problem?
Does your model recommend the overbooking strategy? Any suggestions?
