The Basic Environments

Environments


Download audio here.
Audio Transcript Available here

Exclusive Choice (Choose, at most one investment option)

In this environment you'll probably be given several investments options from which to choose. You're allowed to choose (at most) one of these options. Generally, the investment with the highest PW, AW or IRR will be chosen since they have the highest utility/value.

EG: Investment Option A,B,C,D
A=Brand 1 Air Conditioner
B=Brand 2 Air Conditioner
C=Brand 3 Air Conditioner
D=Brand 4 Air Conditioner

Choosing the right air conditioner brand for the office to benefit the firm.

If investment assets are limited, or the investment costs are high with respect to the available assets, this may be the option that is used.

Unconstrained Choice (Choose as many as you wish but no more than one of any given option, e.g., fries and onion rings but not two orders of onion rings.)

In this environment you'll probably be given several investment options from which to choose (like Exclusive Choice). Unlike exclusive choice, however, you may choose as many projects as you wish so long as they are good investments. Generally, investments which have positive numbers (any increase in utility) will be chosen.

EG: Investment Option A,B,C,D
A=Air Conditioner
B=New Windows
C=Massage Chairs
D=A Bar in the Office Lobby

Choosing the right type of investment to maximize utility or benefits in the firm.

If there is a large amount of assets availalbe, or the investment costs are low with respect to the available assets, this may be the option that is used.

(Important Notes) – 1) Be careful that you identify which environment your working with (wording is very important). If asked to pick the best asset that means exclusive choice, whereas the best assets means unconstrained choice. 2) Know whether service is necessary. If you're required to provide service you may have to choose projects with negative numbers. On the other hand if providing service isn't required, you may not end up selecting an item at all if no projects lead to increases in utility.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License