Solutions Quantitative Methods May, 2009

Question 1
1.
A520 = 10000 (1 + 0.0019) 520 = 26,833.41

(1 + 0.0019) 52 = 1 + i
i = 0.103742 or 10.37%pa
2.
Net Revenue
per year
Initial
Cost
Project

A
B
C

1,000
1,000
500

500
200
50

400
400
200

300
300
200

200
400
100

100
400
50

A
B
C

-1,000
-1,000
-500

476.19
190.48
47.62

362.81
362.81
181.41

259.15
259.15
172.77

164.54
329.08
82.27

78.35
313.41
39.18

NPV

Recommend B since it gives the highest NPV

3. Payback Periods: choose A
A
B
C

2.333333
3.25
3.5

It does not take into consideration the time value of money nor cash inflows after
the payback period.
4.
Normal rate: Cost = 18.20 +0.142 (D+N)
Economy rate: Cost = 22.70 + 0.162 D + 0.082 N
Economy rate < Normal Rate:
18.20 +0.142 (D+N) > 22.70 + 0.162 D + 0.082 N
0.06N>4.5+0.02D
6N>450+2D
3N-225>D
D<3N-225
That is, when the average daily consumption is less than three times the night
consumption minus 225 units.
Question 2
1. 15000=P(0.9)3 => P =15000/(0.9)3=20576.13
2. Face Value = 10000

341
455
23

Coupon rate = 7.5% p.a. => Coupon Value = 750

Discount rate = 7% p.a.
Redeemed at par in 15 years => n=15
Bond value:
15

1
(1
)
750
10000
0.63755
1
.
07
PV =

+
= 700.9346
+ 3624.46 = 10455
15
1
1.07
0.06542
1.07
(1
)
1.07
3.
TR = 2500 - 20Q - 3Q2 = 500Q 10Q 2 Q 3 + C

TR = PQ = 2500Q 10Q 2 Q 3
P = 2500 10Q Q

( when Q = 0, C = 0)

Q 2 + 10Q (2500 P) = 0

Q=

10 100 + 4(2500 P) 10 2 25 + 2500 P

=
= 5 25 + 2500 P
2
2

4.
P(northeast)= P(northeast and low) + P(northeast and medium) + P(northeast and
high) = 0.04 +0.05 + 0.03 = 0.12

Low
Medium
High

NE
0.04
0.05
0.03
0.12

S
0.12
0.08
0.05
0.25

MW
0.14
0.06
0.08
0.28

W
0.19
0.12
0.04
0.35

0.49
0.31
0.2
1

P(W|Medium or High) = 0.16/0.51=0.313725 not the same as P(W)

P(Medium or High | W) = 0.16/0.35 = 0.457143 not the same as P(Medium or High)
Not independent given the above calculations. The expected growth depends on the
region, of which more have been from the West in the above data would check
sample sizes (bias)
P(Medium or High): NE has a better outlook, but fewer representation in the sample
0.666667

0.52

0.5 0.457143

In short, someone would have to check (gather more information) on regional

outlook.
Question 3
1.
Let
X1 = number of barrels of crude oil Y100 to produce refined regular
X2 = number of barrels of crude oil Y100 to produce refined economy
X3 = number of barrels of crude oil Y220 to produce refined regular
X4 = number of barrels of crude oil Y220 to produce refined economy

Hence
X1+X3 = total amount blended to produce the refined regular
X2+X4 = total amount blended to produce the refined economy
0.35X1 +0.60X3 = amount of ingredient A in refined regular
0.55 X2 + 0.25 X4 = amount of ingredient B in refined economy
The objective is to minimise cost in US$
Cost = 30 X1 + 30 X2 + 34.80 X3 + 34.80 X4
Subject to the following constraints
At least 45% of each regular must be ingredient A
0.35X1+0.6X3 <= 0.45 (X1+ X3)
-0.10X1 + 0.15X3 >= 0
At most 50% of each economy barrel should be ingredient B
0.55 X2 + 0.25 X4 <= 0.5 (X2+X4)
0.05X2 -0.25X4 <= 0
Demand
X1+X3 >= 25,000
X2+X4 >= 32,000
Non-negativity constraints
X1, X2, X3 and X4 >= 0
In Excel: changing cells are the number of barrels (X1 to X4) as above, target cell is
Cost which is to be minimized. Constraints are those relative to demand and content
as above as well as the standard non negativity. The latter needs to be ticked as an
option, all the others are entered in the constraint window.
2.
Mean =2.95
Mode = 2 (highest observed frequency = 24)
Median = 3 (middle value)
Mean and median are close; median is what one gets when rounding up the mean.
Either, or median is also in the centre of the range of absences
(Reasonable answers will be considered)
3.
i = 0.03/12 = 0.0025
1 (1.00025) 48
Total = 5,000(1 + 0.0025)
= 255292.7 < 300,000 and therefore it is
1 1.00025
not enough.
1 1.0025 48
300,000 = 1.0025 P
= 1.0025 P 50.93121
1 0.0025
5890.298 = 1.0025 P

P = 5875.609
5876 or 5875.61 will be required to meet the target.
Question 4
1.
A

B
400
500
350

400
400
400

300

400

1550

ARR(A)
ARR(B)

1600

13.75%pa
15%pa

B is higher, choose B.
2.

3. Mean is slightly less than the median, though both are relatively close given the
standard deviation that shows a very large variance, skewness is small and positive.
Approximately symmetric or a just bit skewed (depending on how it is argued).
x 1.96 SE = 528970.80 1.96 18008.4 = 528970.80 35296.47 = [493674.33 , 564267.28]
4. We assume independence and thus: 0.95 x 0.95 x 0.95 = 0.857357 ~ 85.74%
Question 4
1.
X: number filing for bankruptcy

X~Bin(n=100, p=0.035)
Mean = 3.5 < 7 => approximate by a Poisson distribution with the same mean (since
an estimate is asked).
1- P(X<2) = 1 P(X=0)- P(X=1) = 1 e 3.5 3.5e 3.5 = 1-0.030197-0.1056895=
0.8641135 ~ 86.4%
or using the Binomial (not an estimate)
1- (0.965)100 100 (0.035)(0.965) 99 = 0.868772= 86.88%
2.

x ~ N (12.2,3.6 2 / 9)
10 12.2
P( x < 10) = P( z <
= -1.83333) = P( z > 1.83) = 0.0336
3.6 / 3
3.
A: customer has dinner with sales person
B: customer buys car
P(B)=0.1; P(A|B) =0.4 P(A| not B) =0.1
Thus: P(not B) = 0.9 P(not A|B)= 0.6 P(not A| not B) =0.9
P(B|A)>P(B)?
P( A B)
P( A | B) P( B)
P( B | A) =
=
=
P( A)
P( A | B) P( B) + P( A | notB ) P(notB )

0.4 0.1
= 0.308
0.4 0.1 + 0.1 0.9
Yes: they have a higher probability since 0.308>0.1.
=

4.
n=100
=0.3

(1 )
p ~ N ,

P (0.25<p<0.35)?
0.25 0.3
0.05
z1 =
=
= -1.09109 ~ -1.09
0.3 0.7 0.004583
100
0.35 0.3
z2 =
= 1.09109 ~ 1.09
0.3 0.7
100
From table A2: P(z>1.09)= 0.1379
P (0.25<p<0.35)= 1- 2P(z>1.09)= 0.7242
5.
95% CI = sample mean + or 1.96 standard errors
For group 1: [51.75-1.96 (1.334), 51.75+1.96(1.344)] = [49.135, 54.365]

For group 2: [40.07-1.96(0.808), 40.07+1.96(0.808)] = [38.486, 41.654]

Intervals do not overlap. (If approximate: sample mean + or 2 standard errors also
fine.)
Hypothesis Test:

2 2
Large samples: x1 x2 ~ N 1 2 , 1 + 2

n1
n2

H 0 : 1 2 = 0
H 1 : 1 2 0
z=

x1 x 2

12
n1

22

n2

51.75 - 40.07
26.27 2 15.59 2
+
388
372

> 1.96

There is difference in means

Question 6
1.
Pr( x 2) = 1 Pr( x = 0) Pr( x = 1) = 1 e 4.8 4.8e 4.8 = 0.952267 = 95.23%
2.

H 0 : = 80
H 1 : > 80

= 8; n = 25
test statistic :
x 80 83 80
z=
=
= 1.875 < 2.327 (Table A2 : since P(z > 2.32) = 0.0102 and P(z > 2.33) = 0.0099
8/5
/ n
Hence, would not recommend change.
3.

H 0 : 1 2 = 0.12
H 1 : 1 2 0.12

p p ~ N ,
1

z=

0.2 0.28 + 0.12

0.2 0.8 0.28 0.72
+
500
400

(1 1)

+2

(1 2)

n2

0.08 + 0.12
0.04
=
= 1.393728 < 1.96
0.0287
0.0287

No evidence against the manufacturers claim.

4.
a. The strength of the linear correlation between the pairs of variables, that shows a
positive association (when one increases so does the other). The strongest association
appears to be between salary and home value.
b.
Home Value = 37.37 + 1.11 Salary + error
Model is significant and explains 23% of the variance in the home value, p-values are
zero and t-statistics are large. However, the plot indicates potential nonlinearity and
thus the model may be of limited use to predict