Texas Petroleum Company is a producer of crude oil that is considering two drillingprojects with the following profit outcomes and associated probabilities:Drilling Project, AProfit-$300,000100,000500,000600,000Probability(percent)10602010Drilling Project, BProfit-$600,000100,000300,0001,000,000The manager's attitude toward risk is as follows:Profit ($'000)-600-300100U(II)0.000.050.20Note: U(II) stands for utility index of profit.3000.305000.45Probability(percent)152540206000.551,0001.00In making decision under risk, which project will be chosen by the manager of TexasPetroleum Company based on his behaviour toward risk? Also describe the manager'sways of handling decision-making associate with risk. Justify your answers usingnumerical explanation.

There are two projects, and one project needs to be chosen. Apart from this, the utility indexes…

Answered: Texas Petroleum Company is a producer…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 37P

See similar textbooks

Similar questions

A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table. State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative 52 Purchase, d 610 -200 Do not purchase, d, (a) If the probability that the rezoning will be approved is 0.5, what decision is recommended? O purchase O do not purchase What is the expected profit (in dollars)? (b) The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning…
A software company recently designed and developed a new service for its customers. However, it needs to decide whether to launch the service next month or wait for six months. The company performs research and discovers the probability of success for both options, along with their potential revenue. It also learns the probability of failure and corresponding losses for each. *Option A: Launching the service next month has a 55% probability of success with potential revenue of $250,000. It has a 45% probability of failure with a potential loss of $125,000.* *Option B: Launching the service in six months has a 65% probability of success with potential revenue of $400,000. It has a 35% probability of failure with a potential loss of $200,000.* Which option should the company pursue?
A company is considering either (1) purchasing equipment for use on a new project (purchase cost = $5,000; purchase variable cost = $50 per day) or (2) leasing this equipment from a vendor at a rate of $100 per day. An initial analysis determined that the “purchase” option break-even point is 100 days. Based on this analysis, the company should Lease the equipment if the expected project is expected to last more than 100 days Purchase the equipment if the expected project is expected to last less than 100 days Purchase the equipment if the expected project is expected to last more than 100 days No answer text provided.
A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table: a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? What is the expected profit? b. The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows: Let H = High resistance to rezoning L = Low resistance to rezoning P(H) = 0.55 P(S1 | H) =…
A real estate investor has the opportunity to purchase land currently zoned residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table: State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative S1 S2 Purchase, d1 590 -160 Do not purchase, d2 0 0 If the probability that the rezoning will be approved is 0.5, what decision is recommended?Recommended decision: What is the expected profit?Expected profit: $ fill in the blank 2 The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more…
4. "Family Man," a construction company, is considering whether to bid on a contract for a new housing complex. The cost of preparing a bid USD 200,000. “Family Man" has a 0.8 probability of winning the contract, if it submits the bid. If "Family Man" wins the bid, it has to pay USD 2000,000 to be a project partner of the project. As per the usual practice, "Family Man" will then consider consulting a market research firm "Marquess" to conduct a market survey to forecast the demand of housing complex before beginning the construction. "Marquess" charges a fee of USD 150,000. Now, the demand scenario can be either "High demand" or "Low demand." "Family Man" gets a revenue of USD 5000,000 and USD 3000,000 in case of "High demand" and "Low demand" scenario, respectively. On the other hand, instead of construction, "Family Man" has a provision of selling its project rights to another project partner construction company at the price USD 3500,000. As per the historical data, "Marquess"…
Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.7 probability that the textbook will be successful. If successful, a profit of $210,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $50,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests that probabilities P(F) = 0.6 and P(U) = 0.4 apply. Let s1 = the textbook is successful, and s2 = the textbook is unsuccessful. The editor’s initial probabilities of s1 and s2 will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(s1 | F) = 0.15 P(s1 | U) = 0.465 P(s2 | F) = 0.85…
Anand Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.6513 probability that the textbook will be successful. If successful, a profit of $950,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $150,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or an unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests probabilities P(F) = 0.7 and P(U) = 0.3 apply. Let s₁ = the textbook is successful, and $₂ = the textbook is unsuccessful. The editor's initial probabilities of s₁ and s₂ will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(S₁IF): = 0.75 P(S₂IF): = 0.25 P(S₁IU) = 0.421…
Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.65 probability that the textbook will be successful. If successful, a profit of $750,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $250,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests that probabilities P(F) = 7 and P(U) = 0.3 apply. Let s1 = the textbook is successful, and s2 = the textbook is unsuccessful. The editor’s initial probabilities of s1 and s2 will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(s1 | F) = 0.65 P(s1 | U) =…
Jeffrey Mogul is a Hollywood film producer, and he is currently evaluating a script by a new screenwriter and director, Betty Jo Thurston. Jeffrey knows that the probability of a film by a new director being a success is about .10 and that the probability it will flop is .90. The studio accounting department estimates that if this film is a hit, it will make $25 million in profit, whereas if it is a box office failure, it will lose $8 million. Jeffrey would like to hire noted film critic Dick Roper to read the script and assess its chances of success. Roper is generally able to correctly predict a successful film 70% of the time and correctly predict an unsuccessful film 80% of the time. Roper wants a fee of $1 million. Determine whether Roper should be hired, the strategy Mogul should follow if Roper is hired, and the expected value.
The Hard to Beat Bakery is deciding whether to buy or repair an existing oven thatthey have been using for over 8 years. If they elect to repair, it will cost the entity$950,000 and either of two outcomes is likely: 1. A 20% probability it will perform okay and generate revenues of$10,000,000, or 2. An 80% chance that it will be partially restored and generate revenue of$2,000,000. If on the other hand however, they purchase a new oven, they can either buy animported oven for $3,500,000 or they can buy a locally made one for $2,200,000.If the elect to purchase the imported oven, production will earn them revenues of$15,550,000, but if they buy the locally made oven, there is a 70% likelihood thatit perform as expected and generate revenues of $12,000,000; and a 30% chancethat it will not and generate revenues of $6,000,000. Required: 1. Draw a decision tree of this problem and determine the expected value.2. Advise the management of the Bakery on how to proceed.3. Briefly discuss the…
Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that ther is a probability of 0.40 that the ATR Co. does not follow with a competitive product. Weiss's expected profit is $50,000; If weiss adds an assembley line and ATR follows suit, Weiss still expects $15,000 profit. If Weiss adds a new plant addition adn ATR does not produce a competitive product, weiss expects a profit of $600,000; if ATR does compete for this market, weiss expects a loss of $100,000 a) Expected value for the Add Assembly Line option=$____

SEE MORE QUESTIONS

Recommended textbooks for you

Practical Management Science

Operations Management

ISBN:

9781337406659

Author:

WINSTON, Wayne L.

Publisher:

Cengage,

Practical Management Science

Operations Management

ISBN:

9781337406659

Author:

WINSTON, Wayne L.

Publisher:

Cengage,

SEE MORE TEXTBOOKS