Section A.

Cost of capital=0.13

Use the cost of capital provided to answer the following Build all of your analysis within an EXCEL worksheet. Post EXCEL worksheet Attach excel worksheet.

You were hired by a firm that analyzes sports video and compiles statistics that are then provided to the customer. The firm is called SA (Sports Analysis). Please describe in general to the software developers what real option analysis is.

ACTION - EXPLAIN REAL OPTION ANALYSIS BRIEFLY IN OWN WORDS.

2. The firm is considering a project that with the following cash flows. Is this a good or bad project based on your analysis (compute NPV at a minimum). Use the interest rate given in previous question(0.13).

Project Soccer is expected to cost -200,000 and have cash flows of $50,000 in each of the next six years.

ACTION - EVALUATE PROJECT SOCCER GIVEN THE ABOVE INFORMATION.

3. New information has come available in which a competitor may enter the market. You believe that there is a 40% chance the competitor will enter the market. If the competitor enters the market your cost will not change, but your expected cash flows will be $30,000 in each of the next six years. If you invest now you do not know if the competitor will or will not be in the market.

ACTION - EVALUATE THE NPV GIVEN THE POSSIBLITY OF A COMPETITOR

4. An option the firm has is to wait a year and see if the other firm decides to enter the market. Using the same cash flow assumptions ($50,000 CF with no competitor and $30,000 CF with a competitor) evaluate the NPV given this option. Note if you wait you will know prior to your initial cost if the competitor will or will not enter the market.

ACTION -EVALUATE THE NPV GIVEN THE OPTION TO DELAY

ACTION - COMPUTE THE VALUE OF THE DELAY OPTION

5. Finally assume that the firm has another opportunity to invest $1 million in the soccer market. The investment will return $100,000 in each of the next four years. The initial investment will allow for the option to earn a contract that is valued at $2M at year five. The probability of earning this contract is 50%.

ACTION - COMPUTE THE VALUE OF THIS PROJECT GIVEN THE OPTION TO EXPAND (EARN THE CONTRACT).

Attach EXCEL spread sheet

Section B.

Question 1:

Consider the market structure of pharmacies, given the current Covid - 19 situations.

a)Considering only local medicines, under which market structure do pharmacies fall under? Explain your answer linking pharmacies with the assumptions of the market structure.

b)As demand for medicines is going up, hence the demand for pharmacies is also going up. What will happen to the profits in the short run?

c)How will the market adjust in the long-run equilibrium? Draw the relevant diagrams and explain in terms of pharmacies.

Question 2:

Consider the market structure of the restaurants in Dhaka City.

a)What type of market structure can this be characterized as? Explain your answer by linking the case of restaurants with the assumptions of the market structure.

b)As demand goes up, what happens to the profits of the restaurants in the short run?

c)If this leads to new entry, how will the market return to long-run equilibrium to attaining normal profit? Show the diagram of profit and normal profit.

d)How can a restaurant continue to keep profits in the long run? Suggest two strategies they can apply.

e)To achieve productive efficiency in relation to their excess capacity problem, what can a restaurant do? Will it be a wise strategy to do so?

Question 3:

Consider the garments industry in Bangladesh.

a)Given that most of the companies in this industry work with similar brands with similar requirements at similar prices, which market structure can you approximately associate it with? Why?

b)Under what circumstances will a monopolistic structure be preferred to the market structure you have mentioned above? Draw a diagram to explain.

What is the concentration ratio? If the concentration ratio is high, what is it mean for the size of the industry in terms of the number of firms in the industry?

Part c.

Page 3 Question 2 Consider a twoperiod economy populated by many' identical househoids whose preferences are described by the utility function in C1 + ii in C; . where C; and E\"; denote consumption in periods 1 and 2. ,8 parameter representing the subjective discount factor. Assume that consumption is a composite of tradable and non-tradable goods described by the Cobb-Douglas aggregation technologies: C; = (CI )'TCI" )1". where C? is the consunption of tradable goods and Cf" Is the consumption of non-tradabie goods. y is a parameter defining the relative importance of h'adabie consumption in utility. Suppose that the household is endowed with Q? and 09" units of tractable and nontradabie goods in periods t = 1. 2. Households start period 1 with no debt or assets. in period 1. households can borrow or tend through a bond, denoted 31. denominated in units of tractable goods and paying the interest rate r in period 2. The budget constraint of the household in period 1 is then given by PIC? + Prcl\" + i'f'ii'1 = PIT I+ Ff" i\". where P13" and Pf" denote the prices of tredable and nontradable goods and B, is the stock of the bond. The optimality conditions are the toliowing: 65' = 19(1 + eat\" and c\" = 1 _ YC'T 1" Pt Where 35': is relative price of nonutradable goods. A) What is the effect of an improvement In the counter terms of trade on the equilibrium relative price of tradable goods? What is the intuition behind it? [10 merits] B} What is the effect of an increase in the endowment of tractable goods in period 1 on equilibrium relative prices of non-tradable goods and on the real exchange rate