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SOME PROBLEMS
1. IF SMALL FACILITY IS BUILT AND DEMAND IS LOW, THE NET PRESENT VALUE WILL
BE $400,000. IF THE DEMAND IS HIGH, THE FIRM CAN EITHER MAINTAIN SMALL
FACILITY OR EXPAND IT. NPV OF EXPANSION WOULD BE $450,000 AND
MAINTENANCE WOULD BE $50,000. IF A LARGE FACILITY IS BUILT AND DEMAND IS
HIGH, THE ESTIMATED NPV IS $800,000. IF DEMAND TURNS TO BE LOW, THE NPV
WILL BE - $10,000. THE PROBABILITY OF HIGH DEMAND IS 60%.
2.
FIND DECISION USING FOUR APPROACHES OF DECISION MAKING UNDER
UNCERTAINTY
A)
Possible Future Sale
Facility
Low
Medium
High
Small
10
10
10
Medium
12
12
Large
(4)
16
B)
Possible Future Demand
Facility
Low
Medium
High
Small
15
18
20
Medium
10
13
Large
10
12
21
BUILD LARGE AND DEMAND IS LOW THEY CAN DO NOTHING WITH PAYOFF (10) OR
CAN REDUCE PRICE WITH PAYOFF 50. IF THE DEMAND IS HIGH THE PAYOFF IS 70.
ALL THE VALUES ARE IN MILLION DOLLAR. THE PROPABILITY OF LOW DEAMND IS
40%. DRAW A DECISION TREE AND FIND THE DECISION.
4. COMPANY Y IS DECEDING ON NEW PRODUCT. IF THEY DEVELOP PRODUCT A AND
DEMAND IS LOW , THEY CAN DO NOTHING WITH PAYOFF 30 OR CAN IMPROVE THE
PRODUCT WITH PAYOFF WITH 40. IF THE DEMAND IS HIGH THEY CAN DO NOTHING
WITH PAYOFF 50 OR CAN INCREASE PRICE WITH PAYOFF 60. IF THEY CHOOSE
PRODUCT B AND DEMAND IS LOW THEY CAN PROMOTE WITH PAYOFF 50 OR CAN
REDUCE PRICE WITH PAYOFF 40 OR CAN DO NOTHING WITH PAYOFF 30. IF THE
DEMAND IS HIGH, THEY CAN EXPAND WITH PAYOFF 50 OR THEY CAN OVERTIME
WITH 45. ALL THE VALUES ARE IN MILLION DOLLAR. THE PROPABILITY OF LOW
DEAMND IS 70%. DRAW A DECISION TREE AND FIND THE DECISION.
5. COMPANY Z IS DECEDING ON NEW PRODUCT. THEY CAN DEVELOP NEW PRODUCT
EITHER THOROUGH OR RAPID DEVELOPMENT. IF DEVELOPMENT IS THOROUGH AND
MARKET REACTION IS GOOD, THE PAYOFF IS 1000. FOR MODERATE REACTION,
PAYOFF 50 AND FOR POOR, PAYOFF 2. FOR RAPID, GOODS PAYOFF 800,
MODERATES PAYOFF 60 AND POORS PAYOFF 3. ON THE OTHERHAND, IF THEY
CONSOLIDATE ISO NEW PRODUCT DEVELOPMENT, THEY CAN STRENGTHEN
PRODUCTS OR REAP PRODUCTS. FOR STRENGTHEN, GOODS PAYOFF 900,
MODERATES PAYOFF 20 AND POORS PAYOFF 6. FOR REAP, GOODS PAYOFF 950,
MODERATES PAYOFF 25 AND POORS PAYOFF 1.ALL THE VALUES ARE IN THOUSAND
DOLLAR. THE PROPABILITY OF LOW DEAMND IS 20% AND MEDIUM DEMAND IS 40%.
DRAW A DECISION TREE AND FIND THE DECISION.
6.
A THEME PARK HAS FINISHED THEIR LEASE OF 10 YEARS. NOW THE
MANAGEMENT IS DECIDING ON WHETHER THEY WILL TAKE THE LEASE AGAIN.
AGAIN, TOWN PLANNING BOARG IS DECIDING ABOUT A MOTEL. BASED ON THIS
DECISION, THE MANAGEMENT CAN ALSO RELOCATE THE THEME PARK NEAR THE
MOTEL. THE PROBABILITY OF MOTL APPROVAL IS 35%. THE PAYOFF TABLE IS GIVEN
BELOW.
MOTEL APPROVED
RENEW LEASE
$500000
RELOCATE
5000000
A) FIND EMV FOR ALL ALTERNATIVES
MOTEL REJECTED
4000000
100000
$60
TYPE X2
AVAILABLE
$50
10 HRS
2 HRS
1 HR
3 CUBIC FEET
100 HRS
22 HRS
3 CUBIC FEET
39 CUBIC FT
4X+2Y20
CARBOHIDRATE:
2X+6Y18
PROTEIN:
X+2Y12
X,Y0
PREPARED BY
NAZMUN NAHAR
FACULTY, OM, FBA, AIUB