Problems Management Science

1. Mayor Technology Systems is evaluating the introduction of a new product. The possible
levels of unit sales and the probabilities of their occurrence are given below:
Possible Sales in
Market Reaction Units(D) Probabilities(P)
Low response............................................ 20 .10
Moderate response.................................... 40 .30
High response............................................ 55 .40
Very high response.................................... 70 .20
a. What is the expected value of unit sales for the new product?
expected value
b. What is the standard deviation of unit sales?

std deviation

2. SARAH Corp. is evaluating the introduction of a new product. The possible levels of unit
sales and the probabilities of their occurrence are given.
Possible Sales
Market Reaction in Units Probabilities
Low response............................................ 30 .10
Moderate response.................................... 50 .20
High response ........................................... 75 .40
Very high response ................................... 90 .30
a. What is the expected value of unit sales for the new product?
b. What is the standard deviation of unit sales?

3. King Size Inc., is evaluating a new promotional campaign that could increase sales.
Possible outcomes and probabilities of the outcomes are shown below. Compute the
coefficient of variation.
Possible Additional
Outcomes Sales in Units Probabilities
Ineffective campaign.................................20 .20
Normal response....................................... 30 .50
Extremely effective................................... 70 .30
Coefficient of variation (V) = standard deviation/expected value.

4. Extra Incorporated is evaluating a new advertising program that could increase shoe sales.
Possible outcomes and probabilities of the outcomes are shown below. Compute the
coefficient of variation.
 Additional
Possible Outcomes Sales in Units Probabilities
Ineffective campaign.................................40 .20
Normal response.......................................60 .50
Extremely effective...................................
140 .30

5. Possible outcomes for three investment alternatives and their probabilities of occurrence
are given below.
Alternative 1 Alternative 2 Alternative 3
Outcomes Probability Outcomes Probability Outcomes Probability
Failure............ 50 .2 90 .3 80 .4
Acceptable...... 80 .4 160 .5 200 .5
Successful...... 120 .4 200 .2 400 .1
Rank the three alternatives in terms of risk (compute the coefficient of variation).

6. Five investment alternatives have the following returns and standard deviations of returns.
Returns:
Alternatives Expected Value Standard Deviation
A $600 $150
..................................................
B 400 300
..................................................
C 2,500 225
..................................................
D 500 215
..................................................
E 30,000 6,600
..................................................

Using the coefficient of variation, rank the five alternatives from the lowest risk to the
highest risk.
7. Tomas is highly risk-averse while Sonia actually enjoys taking a risk.
a. Which one of the four investments should Tom choose? Compute coefficients of
variation to help you in your choice.
b. Which one of the four investments should Sonny choose?
Returns—
Investments Expected Value Standard Deviation
Buy stocks............................. $ 7,000 $ 4,000
Buy bonds.............................. 5,000 1,560
Buy commodity futures......... 12,000 15,100
Buy options........................... 8,000 8,850

8. Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk
possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.
a. Which of the following four projects should Mountain Ski Corp. choose? Compute
the coefficients of variation to help you make your decision.
b. Which one of the four projects should Lakeway Train Co. choose based on the same
criteria of using the coefficient of variation?

Returns:
Year Expected Value Standard Deviation
A 527,000 834,000
..................................................
B 682,000 306,000
..................................................
C 74,000 135,000
..................................................
D 140,000 89,000
..................................................

9. Bridget’s Modeling Studios is considering opening in a new location in Miami. An aftertax

cash flow of $120 per day (expected value) is projected for each of the two locations being
evaluated.
Which of these sites would you select based on the distribution of these cash flows (use
the coefficient of variation as your measure of risk)?
Site A Site B
Probability Cash Flows Probability Cash Flows
.15 $ 80 .10 $ 50
.50 110 .20 80
.30 140 .40 120
.05 220 .20 160
.10 190
Expected value $120 Expected value $120