Management Sheet 1 (Decision Making Assignment)
Management Sheet 1 (Decision Making Assignment)
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.
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:
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6) Given the following decision tree:
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.
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.