The 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.
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The 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.
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Use simulation to estimate the probability that producing in house is better than outsourcing. If the company outsources production, it will have to purchase the product from the manufacturer for 25 per unit. This unit cost will remain constant for the next four years. The company will sell the product for 42 per unit. This price will remain constant for the next four years. If the company produces the product in house, it must buy a 500,000 machine that is depreciated on a straight-line basis over four years, and its cost of production will be 9 per unit. This unit cost will remain constant for the next four years. The demand in year 1 has a worst case of 10,000 units, a most likely case of 14,000 units, and a best case of 16,000 units. The average annual growth in demand for years 2-4 has a worst case of 7%, a most likely case of 15%, and a best case of 20%. Whatever this annual growth is, it will be the same in each of the years. The tax rate is 35%. Cash flows are discounted at 8% per year.
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