T A he Intended Learning Outcomes of the Assignment are: 1 trodes to the student the fundamental concepts which can be used to Use and and improve the process of decision-making. . Irn sbPropriate statistical methods to analyse a variety of financial decisions. Improved literature review skills. Section A - Multicriteria Decision Analysis The task of this part is to model, or analyse, a decision (or decisions) using: Multi-Criteria Decision Analysis. The purpose of your model or analysis should be to enable the decision to be made more effectively, so that the outcome is better than it would otherwise have been. Itis important that your decision should be a realistic one. As far as possible, the data (costs, criteria, weights, etc.) you use should be genuine. Where this is not possible, you should explain how you would obtain the information. You should discuss your proposed model with your course tutor. Your course tutor will be marking the assignment, so it wil be easier and helpful if you get their approval. This is to reduce the likelihood of misdirected work. You should submit a written account of your model or analysis. This should include (not necessarily in this order): * Details of the decision maker(s) and the decision(s). + Details of the recommendations you would make to the decision maker. + An explanation/description of your model or analysis. This should make it clear how the model works. You should also submit all relevant spreadsheet files. = The source of any information (costs, criteria, etc.) incorporated in the model or analysis. «An evaluation of the model or analysis. This should include a critical analysis of any assumptions, and comments on the usefulness of your analysis, «References to books, articles, etc. that you make use of. 2|Page yy: P iously all To pass, you will need to submit everything listed above ~ and it should obviously ‘ll qi dit to make good sensel In additi ae we will give more cre In addition, other things being equa mark, YOu should: ambitious projects than to very simple ones. To get 4 99° * Do everything listed above, and . * Pay particular attention to the evaluation of your model, the analysis of its assumptions, and the source of the information it incorporates. Some suggestions These are suggestions only (we are prepared to be very flexible ream ding ta s acceptable, but please check with us before going ahead if you are In any doubt): * Potential business decisions: e.g. on your proposed dot.com + Business decisions: only viable if you work for a business or information from a business. * Personal decisions: e.g. on purchases or rental of acar or a hi courses or careers, on investments, and so on. It may be ap| ae model that will be helpful for any person having to make these decisi may just be considering a single decision maker. or other business. have good access to use, on choices of propriate to build a ions, or you Your report for Section A must not materially exceed 1,300 words in length. Section B - Statistics and Regressions The task is to model, or analyse, the following case study: The annual premiums charged for car insurance for 10 car drivers are shown in the following table. The age of the customer, the number of years that they have not made a claim and their annual mileage are also shown in the table below: £ q & b- Driver Insurance | Age of No. of “No Annual Mileage Driven Premium (£) Driver Claims Years” | (thousands of miles) 41 1,100 17 0 2 2 900 19 2 9 3 7,000 a 1 4 4 750 23 6 6 5 800 28 2 3 6 620 36 3 16 7 500 6 4 12 8 550 48 4 18 9 424 62 10 6 10 250 72 20 5 (So, forexample, a value of 4h the miles driven column would mean tha 44,000 miles per year) t the customer drives 3|PageYou are requ quired to below, do not use the Rae the data above using Microsoft Excel. For parts (c-6) apply the relevant fears mn arlsed Excel functions instead you may use Excel to following questonee US leamt in the course. Specifically, you should answer the (a) Use Exe Promium (Yeu construct a histogram to show the distribution of Insurance (b) Discuss wh will need to choose suitable class intervals). ©) Caaeeee this distribution is normal. ( ceietate the quartiles ofthis distribution, and its inter-quartile range. Galculate the values of both Kendall's and Pearson's correlation coefficients coeficient means i Premium and Age of Driver. Explain what a correlation ans in general terms. e . ( cate the standard deviation of Insurance Premium, laims Years and Annual Mileage Driven. {Age of Driver, No. of Tool with Insurance N , low do a regression analysis using the Excel Regression No Claims Years” and Premium as the dey : pendent variable, and Age of Driver, No. of “ Annual Mileage Driven as the independent variables. e. They are 32 years old, have 8 (f) Suppose a new customer requires insuranct 1. Whatis the estimated insurance claim free years and drive 7500 miles per year premium for this new customer? (g) What conclusions can be drawn from the regression analysis about the effect of age and annual mileage on insurance premiums? (You may find the regression coefficients in the regression output table helpful). (h) What does the R Square value indicate about the regression? (i) Explain the meaning of the numbers in the p-value column of the regression output. Which of the three results are significant at the 6% significance level? Which are significant at the 1% significance level? () Discuss the benefits and difficulties of using muttip to the results obtained in this example if you wish). analysis to the data, discuss what (k) Without applying any additional recommendations for further analysis you would suggest to enhance your conclusions/analysis. e regression (you can refer Your report for Section B should not materially exceed 4,400 words in length. Section C - Monte Carlo Simulations Danske Haldor is a Dansh boatbuilder, based in Copenhagen. The company is currently evaluating a proposal to invest in producing a new type of inshore rescue igns, Type Aand Type B, have now been developed, each boat. Two possible boat desi y peaihich Is expected to have a five-year sales Ife, before @ radical redesign would be required. The Type A design would require an investment of one million krones (DKK), while the Type B would require an investment of two million krones. The expected cash flows of the boat types if there was no inflation (i.e. today’s values), are as follows: 4|PageItem Sales Type A(k000's) | Type B (K000's) Materials 1,800 2,890 Labour 850 1,250 Overheads Ff a The net cash fl lows These net cash fa each boat type are estimated as revenues (sales) minus costs. years. Specific ariel el be assumed to arise at the year-ends of each of the five elements: inflation rates have been estimated for each of the cash flow Sales 4% Materials 3% Labour 7% Overheads 6% | See sales, materials, labour, and overheads for each boat type were exampl using various pieces of information. The sales for each boat type, for For t ple, may not be precisely as estimated above because of various uncertainties. or this reason, they decided to use probabiliy distributions to allow for a range of possible values for the above variables. The associat ‘h variable ted distribution for eac! and the parameters for each probability distribution are given in the following tables (in KO00's): Triangular Distribution Pert Distribution | Sales Min | Most likely | Max | | Materials Min _| Most likely | Max TypeA| 1700 | 1900 _| 2400 TypeA| 600 | 850__{ 900 Type 8 | 2600 | 2890 | 3200 Type B| 1000 | 1260 [1800 Discrete Probability Distribution Labour, Type A I yevalues | 180 | 200 230 | 250 | paalues| 0.3 | 05 | 04 0.4 Normal Distribution Overheads Mean | Standard Deviation Type A| 500 50 Type B| 650 70 is 10 per cent per annum. However, there is a 20% will take a loan to finance the development of the boat will drop to 8 per cent per annum. Finally, the cost of capital i probability that the company types. If that happens the cost of capital (a) For the situation described above, develop first a deterministic model for the Net Present Value (NPV) of each boat type. Use then the information provided for the uncertain variables to run a Monte Carlo simulation and present the results in relevant diagrams (you should at least have two graphs, each Showing the simulated distribution of the NPV for each boat type). 5|PageFormatting The work should b easy to read’ e.g, Ca processed. Font size should be between 12 and 14 and 1.5 and 2 with (approx. i rial, Times New Roman. Line spacing should be between number and the Foote. jo atains all round, The Header must include the student excessive presentation rust include a page number. There are no extra marks for ion; for example elaborate graphics on the cover sheet. Written Report Your report should contain: (1) A clear summary of your results. a pie and clear explanation of how you carried out the calculations. ical discussion of your results and conclusions. The requirements (1), (2) and (3) are i 1 hy vel tant. Make u try to achieve these in your written report. . De Sue ene For example, using clearly presented tables to summarise your results in (1) is good. ‘Spending pages and pages describing in detail what the reader can clearly see from the tables is bad. If you write a poorly structured report with a bunch of spreadsheets/printouts attached atthe end, it is very difficult for the examiner to know what your results are, whether you have carried out the calculations correctly, what your conclusions are, and in general, whether or not you understand what you are doing. Your aim in writing your report must be to convince the reader that you have complete confidence in applying these techniques, that you understand the ideas behind these applications, and that you can critically discuss the results and form reasonable conclusions. Your Report Should + Be written in a plain style, using subheadings and lists where appropriate, «Be properly referenced acknowledging all the sources you have used, and only the sources you have used. + petude evidence of locating end reading sources beyond the suggested initial reading. Referencing. Requirements ‘All sources should be acknowledged and appropriately cited within your work, following the University's approved referencing conventions [APA 6th ed.]. For further guidance see: hilo: /referencing,port.ac.ukl