Explain the criteria of minimising expected cost, and apply it to this problem. Calculate the expected cost with and without the revision course. Note that 'equally likely' implies a probability of 0.5 to each, so that the expected failure rate after the course is (0.05 X 0.5) + (0.10 X 0.5) = 0.075. Then calculate the likelihood of two fails in a sample of 10 using the Binomial distribution and combine with the prior probabilities using Bayes Theorem to find posterior probabilities. Use these posterior probabilities to determine whether the course should run, using expected cost or opportunity loss as the decision criteria. List the assumptions made to answer the question, and assess their relevance in these circumstances.

First explain the DCF and/or internal rate of return methods of investment appraisal, and then use discounting to evaluate the cash flow generated by the squash court. Note the other considerations the University is likely to take into account. (N.B. The Net Present Value of the project at 12% is 852.59, whilst the IRR is 14.6%.) What is assumed about inflation and the attitude towards risk? 10. The first part of the question requires a simple determination of the economic order quantity, either by equating the rise in holding costs to the fall in order costs, or by defining a total cost function and then minimising it. Note the assumptions made. The second part of the question requires application of that model, and the fact that if K x E. 0. Q. is ordered, inventory costs rise by (K-1? 2K xM.A.C. Hence compare the rise in inventory costs to the value of the discount. A probability distribution of demand requires that inventory be adjusted according to the costs.

and EVPI is the difference between the best possible decision and the performance best achieved without perfect information, it should be easy to show min EOL = EVPI. Note a simple example would help. (b) this is a simple application of the Binomial distribution, with P(X = x) = 5Cx(0.4Y(0.6)5 -x (c) refer to Chapter 4, pages 85-9. Note the similarity! 3. This question involves the careful definition of implicit and explicit costs, and is best answered by defining profit as the surplus over opportunity cost. From an economic view there is little difference between owning and renting the store, since opportunity costs are likely to be similar.

The question involves estimating the parameters of the equation D, = a+bP+ct Given lots of time and some computational ability, a, band c can be estimated by linear regression. In the absence of either, substitution is an acceptable method if the relevant assumptions are made explicit. Note that if November is assigned a time value of 1, December 2, etc., then in April t = 8. Then estimate elasticity using the arc formula: !!lD P1 + P2 Ep=- !!lP D1 + D2 Sales revenue can be maximised either by finding the total revenue function (when t = 8) and then differentiating and setting =0, or by finding the price at which point elasticity = -1. Note that the method used combines both explanatory and extrapolatory approaches and is liable to the problems inherent in each.