W.9_David King_Statistical Process Control


 

Problem Recognition, Definition, and Evaluation

As the USD is compared to gold and the value of gold is inflating and the value of the dollar is deflating, it is creating a rise in the cost of goods and services globally. This affects me directly as I am prepared to start my MBA program and it is a costly purchase. What would be the total cost of the program taking into consideration the fluctuation in price of gold and the devaluation of the USD?

Development of the feasible alternatives

The university will set their prices, and the university has control over that. However, how much they charge could be equal to their purchasing power which is in turn related directly to the price of gold leaving only 3 outcomes:

  1. The cost of the MBA will increase during the 21 months of the program because the value of gold will increase and the dollar will deflate.
  2. The cost of the MBA will remain constant at its present rate during the 21 months of the program.
  3. The cost of the MBA will decrease during the 21 months of the program because the value of gold will decrease and the dollar will inflate.

Development of outcomes and cash flows for each criteria

The university set the price at $26,000 for the MBA which lasts approximately 2 years, and the program concludes in 2013. If the cost of the program was to increase or decrease, it would be a fair and logical assumption to believe that it would trend with the price of gold.

If the program would remain the same price, the cost of the program in gold today would be = the cost of the program / the current price of gold = $26000/ $1510.83 = 17.21 oz of gold.

Due to the value of gold being projected to increase (see monthly chart below) from its current value of $1510.83 per ounce and should trend to a higher value by the time the program by the time the program is completed which is $2030.76 an ounce which would make the program cost of $34949.38

If the program price remained constant, the price of the program is $26000.

The price of gold has a 20% chance of declining during the 10 year period of the trend analysis. The only way this will occur if there is outside interference from markets.

Selection of the criterion

  1. Exponential
  2. Linear
  3. Logarithmic
  4. Polynomial
  5. Power

Analysis and comparison of the alternatives

Exponential R squared value = 0.47

Linear R squared value = 0. 50

Logarithmic R squared value = 0.50

Polynomial R squared value = 0.91

Power R squared value = 0.47

Selection of the preferred alternative

All values from 1990-2010 can be rejected as the R squared value is under 0.97 which is the minimal acceptable value for R squared. The polynomial is the only R squared value that meets minimal acceptable standard.

Performance monitoring and post evaluation results

Based on my data from 1990-2010 I can tell the process is in control. The process is in control because all points fall within the control limits and meet all standards from memory jogger to determine if a process is out of control. I would have concerns about the process be going out of control in the near future as the current numbers for gold are on the rise and have a high chance of being outside of normal control limits if 2011 was included in the historical chart.

This is a concern as the current price of gold is equal to where the 2013 price should be which is when I would complete my MBA program. The problem is today’s price contradicts the polynomial trend line as today’s price is over $1500 an ounce.

 

References:

http://www.kitco.com

Sullivan, W., Wicks, E., & Koelling, C. (2012). Engineering Economy (15th ed.). New Jersey: Pearson.

Brassard, M. & Ritter, D. (2010). Memory Jogger (2nd ed.). Salem: New Hampshire

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One Response to W.9_David King_Statistical Process Control

  1. DrPDG says:

    Nicely done, David!! Getting better!!

    The only thing that kept you from getting an OUTSTANDING on this report was your analysis of the feasible alternatives. You seem to have missed (or at least failed to explain clearly) that the purchasing power of gold is relatively CONSTANT- that on average, 2.46 ounces of gold will purchase $1,000 worth of goods. So gold is not the variable, but the value of the dollar and what the dollar will purchase IS the variable.

    Explained another way, IF inflation hits the Universities, (which I cannot see how it won’t) then they will have no choice to increase the cost of tuition. It appears to me that you are still not grasping which is the constant and which is the variable. Why? Because when you did your calculations, you converted MONEY into GOLD when if I had done this analysis, I would have used gold as the baseline and converted it into money. You ended up the same place, but the approach you used raises questions whether you realize that ounces of gold is the relative constant or baseline……

    And to answer your concern that the actual price of gold is over $1,500 when the PREDICTED price of $1,250, only serves as a warning that the numbers you are using are probably on the low side already. The interpretation or implication of that would be NOT to use the average of 2.46 ounces = $1,000 which is only 50/50, but to move to a higher P level, say mean +1 sigma.

    NOW, let’s see what you do with this week’s assignment from a RISK ANALYSIS perspective……

    BR,
    Dr. PDG, Jakarta

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