ESD.71 2008 MID-TERM QUIZ Page 1 of 8 Engineering Systems Analysis for Design Mid-Semester Quiz October 28, 2008 This is a closed book exercise. Computers and other wireless enabled devices for communication with web and outside are not allowed. You may use old-fashioned, non-communicating calculators that are not miniature computers with extensive memory (if you have them! And if so, show me first…) Grade Table There are 90 points possible for the regular test. Points associated with each question correspond to the estimated time it might take to answer them. . Item Score Max Yours Your Name (provided we can read it) 1 Concepts 18 Static valuation of projects 11 Decision Analysis 60 Total 90 I have completed this test fairly, without copying from others, a book, or the web. Please sign your name legibly ______________________________________ (1 point)ESD.71 2008 MID-TERM QUIZ Page 2 of 8 Concepts (18 points) Note: Full marks only for conceptually precise responses Write a short definition or description explaining the following: Technical Efficiency (2 points) Production Function (2 points) Economic Efficiency – define and contrast with Technical Efficiency (2 points) Criterion for Attaining Technical Efficiency (2 points) Isoquant (2 points) Expansion Path (2 points)ESD.71 2008 MID-TERM QUIZ Page 3 of 8 Output Cost Function – define and compare with input cost function (2 points) Discount Rate – define and compare with interest rate (2 points) WACC – define concept and discuss advantages and disadvantages for use as discount rate (2 points)ESD.71 2008 MID-TERM QUIZ Page 4 of 8 Static Valuation of Project (11 points) Consider the project with the following revenues and costs: Year 0 1 2 3 4 Revenues 300 400 600 340 Costs 1200 25 37 41 48 Net Cash Flow (1+r)N Present value Assume a discount rate of r = 10%. Use no more than 3 significant figures a) Define Net Present Value (NPV) and calculate it for this case (5 Points) b) How would you calculate the benefit-cost ratio? What are the major advantages and disadvantages of the Benefit/Cost ratio as a criterion of evaluation? (3 points) c) Define and Calculate the Pay Back Period. What are the major advantages and disadvantages of this criterion of evaluation? (3 points) .ESD.71 2008 MID-TERM QUIZ Page 5 of 8 Decision Analysis (60 points) Congratulations! You’re the consultant to the UN agency about to launch satellites to provide educational resources over central Africa. Your job is to help choose the system architecture. They face 2 choices. Either they launch 2 satellites right away, or they launch 1 with the possibility of launching a second one 5 years later. If they launch only one, they are committed to launch the second if growth in demanded educational resources in the first period is “high”. Conversely, if the growth in the first period is “low”, they are required to stay with only 1 satellite. The UN education advisors estimated the possible results from the project, in terms of the number of students served in each period. They believe that: • the first period “high” and “low” outcomes are equally likely, and • the following second period possible outcomes are also equally likely. Note that the actual number of students served depends on the availability of sufficient capacity in the satellite fleet. Students Served, millions Students Served, if no constraints First Period Second Period first second total Probability High = 120 180 120 180 300 1/4 140 120 140 260 1/4 Low = 80 140 80 140 220 1/4 100 80 100 180 1/4 The best estimates of cost and performance are given below. Costs are all in present values. 2 Satellites 1 Satellite 2nd Satellite at t = 0 at t = 0 at t = 5 Ground Stations 30 20 10 Launches 10 10 10 Satellite 80 40 30 Total Present Costs 120 70 50 Capacity (in terms of Maximum students served) 180 100 70 Let’s first examine the technology. a) Define the concept of the returns to scale. What are they for the production of educational capacity? Show how you determined this conclusion. (5 points)ESD.71 2008 MID-TERM QUIZ Page 6 of 8 b) What about economies of scale? Show how you came to that conclusion (4 points) c) Why is it possible to get different results for returns and economies of scale? (3 points) Now proceed to the decision analysis of the situation d) Draw the decision tree for this choice, giving all information provided. (6 points) Remember, the performance of the system (in terms of number of students served) can be constrained by the satellite capacity available e) Define and calculate the value of the strategy that maximizes the expected number of students served over the 2 periods (6 points)ESD.71 2008 MID-TERM QUIZ Page 7 of 8 One metric is not enough f) Graph the Value At Risk and Gain (VARG) for the two system architectures (8 points) g) Fill in the table of possible measures of performance of the system (10 points) Metric 2 Satellites now 1 Satellite now Which Preferable? E(Students Served) Max Students Served Min Students Served Initial Investment Cost-Effectiveness = Students/investment $ h) Now that you have the information from the VARG and the table, discuss the relative merits of the choices. Which would you recommend? Why? (6 points)ESD.71 2008 MID-TERM QUIZ Page 8 of 8 Value of Information You realize that it would be nice to resolve the uncertainty about whether the demand for satellite education would be “high” or “low” in the first period. i) Define the concept of perfect information? (3 points) j) Set up the appropriate decision tree for defining the Expected Value of Perfect Information (EVPI), based on the assumption that you should focus on maximizing the expected number of students served (6 points) k) Based on the above, what is the EVPI (3
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