Determine the best decision based on the optimistic decision making approach. Decision d1 d2 d3 State of Nature s2 28 17 40 $1 -5 19 3 s3 50 15 6
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- Play Things is developing a new Lady Gaga doll. The company has made the following assumptions: The doll will sell for a random number of years from 1 to 10. Each of these 10 possibilities is equally likely. At the beginning of year 1, the potential market for the doll is two million. The potential market grows by an average of 4% per year. The company is 95% sure that the growth in the potential market during any year will be between 2.5% and 5.5%. It uses a normal distribution to model this. The company believes its share of the potential market during year 1 will be at worst 30%, most likely 50%, and at best 60%. It uses a triangular distribution to model this. The variable cost of producing a doll during year 1 has a triangular distribution with parameters 15, 17, and 20. The current selling price is 45. Each year, the variable cost of producing the doll will increase by an amount that is triangularly distributed with parameters 2.5%, 3%, and 3.5%. You can assume that once this change is generated, it will be the same for each year. You can also assume that the company will change its selling price by the same percentage each year. The fixed cost of developing the doll (which is incurred right away, at time 0) has a triangular distribution with parameters 5 million, 7.5 million, and 12 million. Right now there is one competitor in the market. During each year that begins with four or fewer competitors, there is a 25% chance that a new competitor will enter the market. Year t sales (for t 1) are determined as follows. Suppose that at the end of year t 1, n competitors are present (including Play Things). Then during year t, a fraction 0.9 0.1n of the company's loyal customers (last year's purchasers) will buy a doll from Play Things this year, and a fraction 0.2 0.04n of customers currently in the market ho did not purchase a doll last year will purchase a doll from Play Things this year. Adding these two provides the mean sales for this year. Then the actual sales this year is normally distributed with this mean and standard deviation equal to 7.5% of the mean. a. Use @RISK to estimate the expected NPV of this project. b. Use the percentiles in @ RISKs output to find an interval such that you are 95% certain that the companys actual NPV will be within this interval.If you want to invest in a project that cost $3.5 million. As we are unsure about the future demand, there is a 40% probability of high demand with a present value for the project $3 million. There is a 25% probability of moderate demand with a present value of $2.5 million. In addition, there is a 35% probability of low demand with a present value is $1.5 million. Draw a decision tree for this problem. What is the expected net present value of the business? Should you invest? Explain. Assume that you can expand the project by investing another $0.6 million after you learn the true future demand state. This would make the present value of the business $3.9 million in the high‐demand state, $3.5 million in the moderate demand state, and $1.80 million in the low demand state. Draw a decision tree to reflect the option to expand. Evaluate the alternatives. What is the net present value of the business if you consider the option to expand? How valuable is the option to expand?Which investment should Warren make under each of the following criteria? a. Maximax criterion. b. Maximin criterion. c. Maximum likelihood criterion. d. Bayes’ decision rule. e. The investor decides that Bayes’ decision rule is his most reliable decision criterion. He believes that 0.1 is just about right as the prior probability of an improving economy, but is quite uncertain about how to split the remaining probabilities between a stable economy and a worsening economy. Therefore, he now wishes to do some sort of sensitivity analysis with respect to these latter two prior probabilities. If he still wants to choose the alternative from the Bayes’ decision rule (part d): e1. How much would be the maximum amount of the prior probability of a stable economy? e2. How much would be the minimum amount of the prior probability of a worsening economy?
- Please show the steps by using the formula for each Salalah Methanol company management is considering three competing investment Projects Option1: Starting a unit in Sohar, Option 2: Starting a unit in Musandam and Option 3: Starting a unit in Muscat. The initialinvestment for all the projects are 11000 and the cost of capital is 4.05% Year Sohar Musandam Muscat 1 1100 2160 3225 2 3100 3260 4250 3 3800 4360 5475 4 4600 5460 6300 5 5100 6900 7000 Use the information below and help the management in choosing the most desirable Project using a. Payback period b. Discounted payback c. Net Present value d. Profitability Index. You have to suggest to the management which project to choose and whyThe Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars): State of Nature Low Demand Medium Demand High Demand Decision Alternative s1 s2 s3 Manufacture, d1 -20 40 100 Purchase, d2 10 45 70 The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30. Use a decision tree to recommend a decision.Recommended decision: Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand. EVPI: $ fill in the blank 3 A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F | s1) = 0.10 P(U | s1) = 0.90 P(F | s2) = 0.40 P(U |…Use the table below to answer the questions that follow and caculate the Expected Monetary Value(EMV) of the different outcomesDECISION TABLE WITH CONDITIONAL VALUESSTATE OF NATUREFAVORABLE OUTCOME UNFAVORABLE OUTCOMEALTERNATIVES ($) ($)Start a big Company 2,000,000 -500,000Start a small company 800,000 -200,000Build Nothing 0 0Probabilities 0.3 0.7Calculate the following The EMV Maximin criterion Maximax criterion Minimax criterion
- A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand, an average market demand or low market demand. The following table summarizes the company's decision situation (profits in thousands of dollars). Alternative 00 540 300 240 O 100 30% High Dem. 1,000 Expand Facilities Acquire Competitor Subcontract Production What is the Expected Value of Perfect Information for the small parts manufacturer? 800 Ave. Dem. 200 600 -300 30% 100 Low Dem. -1,000 -400 0The following payoff table shows the profit for a decision problem with two states of nature and three decision alternatives, Decision State of Nature Lternative s1 S2 D1 10 30 D2 -5 20 D3 60 -10 Identify the decision taken under the following approaches: (1) Pessimistic (2) Optimistic (3) Equal probability (4) Regret (5) Hurwicz criterion. Note : The decision maker's degree of optimism (a) being 0.6.Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows Decision High Low Introduce $4,000,000 -$2,000,000 Do Not Introduce 0 0 Probability 0.3 0.7 You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results Result High Low Predicts High 0.4 0.1 Inconclusive 0.4 0.5 Predicts Low 0.2 0.4 c) Draw the complete decision tree, including the survey option. Explain where the values on the decision tree come from
- 1. If today stock is trading for $60 a share. You are confident that the stock price will experience a change in the value of over 30% relative to the current price in either upward or downward direction over the course of next year. Today you decide to transact in either one or two stocks maturing in one year. The strike price of both options is $60 a share. The call option premium is $6 and put option premium is $5. Given this information and your belief, you should _______. a. buy 2 calls b. buy 1 call and sell 1 put c. sell 1 call and 1 sell put d. buy 1 call and buy 1 put e. sell 2 puts Please explainThe following payoff table shows a profit for a decision analysis problem with two decision alternatives and three states of nature. In order to get full credit, show your all work done step by step including cell calculations using excel functions. State of Nature Decion Alternatives s1 s2 s3 d1 250 100 50 d2 100 75 100 a) Construct a decision tree for this problem. b) Suppose that the decision-maker obtains the probabilities P(s1)=0.65, P(s2)=0.15, and P(s3)=0.20. Use the expected value approach to determine the optimal decision.Peter Martin will help his brother who wants to open a grocery store. Peter initially believes there is a 50-50 chance that his brother's food store will be successful. Peter is considering doing market research. Based on historical data, there is a 0.8 probability that the market research will be favorable given a successful store. Furthermore, there is a 0.7 probability that the market research will be unfavorable given an unsuccessful store. a) If the market research is favorable, what is Peter's revised probability of a successful store for his brother?b) If the market survey is unfavorable, what is Peter's revised probability of a successful store for his brother?c) If the initial probability of a successful store is 0.60 (instead of 0.50), find the probabilities of (a) and (b).