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Management Sheet 1 (Decision Making Assignment)

1. The document presents 7 decision-making scenarios involving investments with uncertain outcomes and possible profit/loss amounts. For each scenario, the document provides a payoff table and asks the reader to determine the best investment using various decision criteria like maximax, maximin, and expected value. 2. The scenarios involve decisions like what type of business for a real estate investor to invest in, whether a concessions manager should sell umbrellas or visors at a football game, and what new product a company should introduce. 3. For each scenario, the document asks the reader to calculate expected values, opportunity costs, and sometimes develop decision trees to determine the optimal investment choice.

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602 views

Management Sheet 1 (Decision Making Assignment)

1. The document presents 7 decision-making scenarios involving investments with uncertain outcomes and possible profit/loss amounts. For each scenario, the document provides a payoff table and asks the reader to determine the best investment using various decision criteria like maximax, maximin, and expected value. 2. The scenarios involve decisions like what type of business for a real estate investor to invest in, whether a concessions manager should sell umbrellas or visors at a football game, and what new product a company should introduce. 3. For each scenario, the document asks the reader to calculate expected values, opportunity costs, and sometimes develop decision trees to determine the optimal investment choice.

Uploaded by

Dalia Ehab
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Faculty of Engineering Management and Marketing (GEN 121)

Architectural Engineering Dept. Assignment # 1 (Decision-Making)


Fall Semester (2018) Dr. Haitham Abbas

1) A local real estate investor in Orlando is considering three alternative


investments: a motel, a restaurant, or a theater. Profits from the motel or
restaurant will be affected by the availability of gasoline and the number of
tourists; profits from the theater will be relatively stable under any conditions.
The following payoff table shows the profit or loss that could result from each
investment:

Determine the best investment, using the following decision criteria.


a. Maximax b. Maximin c. Minimax regret
d. Equal likelihood

2) The owner of the Columbia Construction Company must decide between


building a housing development, constructing a shopping center, and leasing
all the company's equipment to another company. The profit that will result
from each alternative will be determined by whether material costs remain
stable or increase. The profit from each alternative, given the two possibilities
for material costs, is shown in the following payoff table:

Determine the best investment, using the following decision criteria.


a. Maximax b. Maximin c. Minimax regret
d. Equal likelihood
3) A concessions manager at the Tech versus A&M football game must decide
whether to have the vendors sell sun visors or umbrellas. There is a 30%
chance of rain, a 15% chance of overcast skies, and a 55% chance of sunshine,
according to the weather forecast in College Junction, where the game is to be
held. The manager estimates that the following profits will result from each
decision, given each set of weather conditions:

a) Compute the expected value for each decision and select the best one.
b) Develop the opportunity loss table and compute the expected opportunity
loss for each decision.

4) The Miramar Company is going to introduce one of three new products: a


widget, a hummer, or a Nimnot. The market conditions (favorable, stable, or
unfavorable) will determine the profit or loss the company realizes, as shown
in the following payoff table:

a) Compute the expected value for each decision and select the best one.
b) Develop the opportunity loss table and compute the expected opportunity
loss for each product.
c) Determine how much the firm would be willing to pay to a market
research firm to gain better information about future market conditions.

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5) T. Bone Puckett, a corporate raider, has acquired a textile company and is
contemplating the future of one of its major plants, located in South Carolina.
Three alternative decisions are being considered: (1) expand the plant and
produce lightweight, durable materials for possible sales to the military, a
market with little foreign competition; (2) maintain the status quo at the plant,
continuing production of textile goods that are subject to heavy foreign
competition; or (3) sell the plant now. If one of the first two alternatives is
chosen, the plant will still be sold at the end of a year. The amount of profit
that could be earned by selling the plant in a year depends on foreign market
conditions, including the status of a trade embargo bill in Congress. The
following payoff table describes this decision situation:

a) Determine the best investment, using the following decision criteria.


a. Maximax b. Maximin c. Minimax regret
d. Equal likelihood
b) Assume that it is now possible to estimate a probability of .70 that
good foreign competitive conditions will exist and a probability of .30
that poor conditions will exist. Determine the best decision by using
expected value and expected opportunity loss.
c) Compute the expected value of perfect information.
d) Develop a decision tree, with expected values at the probability nodes.

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6) Given the following decision tree:

Determine which is the optimal investment, A or B?

7) A manufacturing company has to decide whether to build a large


manufacturing facility, a small manufacturing facility, or no facility at all.
With a favorable market, It is expected to make $90,000 from the large facility
or $60,000 from the smaller facility. If the market is unfavorable, however, a
loss of $30,000 would be occurred with a large facility and a loss of only
$20,000 with the small facility. Because of the expense involved in developing
the initial molds, the company has decided to conduct a pilot study to make
sure that the market for the products will be adequate. The pilot study will cost
the company $10,000. Furthermore, the pilot study can be either favorable or
unfavorable. The manager estimates that the probability of a favorable market
given a favorable pilot study is 0.8. The probability of an unfavorable market
given an unfavorable pilot study result is estimated to be 0.9. The manager
feels that there is a 0.65 chance that the pilot study will be favorable. Of
course, the company could bypass the pilot study and simply make the
decision as to whether to build a large plant, small plant, or no facility at all.
Without doing any testing in a pilot study, the estimate of the probability of a
favorable market is 0.6. Perform a decision tree analysis. What do you
recommend? Compute the EVPI.

8) A firm that plans to expand its product line must decide whether to build a
small or a large facility to produce the new products. If it builds a small
facility and demand is low, the net present value after deducting for building

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costs will be $400,000. If demand is high, the firm can either maintain the
small facility or expand it. Expansion would have a net present value of
$450,000, and maintaining the small facility would have a net present value of
$50,000. If a large facility is built and demand is high, the estimated net
present value is $800,000. If demand turns out to be low, the net present value
will be $10,000. The probability that demand will be high is estimated to be
.60, and the probability of low demand is estimated to be .40.

a) Analyze using a tree diagram.

b) Compute the EVPI. How could this information be used?

c) Determine the range over which each alternative would be best in


terms of the value of P (demand low).

9) Determine the course of action that has the highest expected payoff for this
decision tree

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10) A firm must decide whether to construct a small, medium, or large stamping
plant. A consultant’s report indicates a .20 probability that demand will be low
and an .80 probability that demand will be high. If the firm builds a small
facility and demand turns out to be low, the net present value will be $42
million. If demand turns out to be high, the firm can either subcontract and
realize the net present value of $42 million or expand greatly for a net present
value of $48 million. The firm could build a medium-size facility as a hedge:
If demand turns out to be low, its net present value is estimated at $22 million;
if demand turns out to be high, the firm could do nothing and realize a net
present value of $46 million, or it could expand and realize a net present value
of $50 million. If the firm builds a large facility and demand is low, the net
present value will be -$20 million, whereas high demand will result in a net
present value of $72 million.

a) Analyze this problem using a decision tree.

b) What is the maximin alternative?

c) Compute the EVPI and interpret it.

d) Perform sensitivity analysis on P (high).

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