Consider the decision tree'below. You are at the starting decision node DO (shown in the orange color). Assume all paths and decisions occur within a 1-year time horizon, so that no discounting is necessary. There are dollar investments, as shown, required at decision nodes D1 and D2. Which of the letters (shown the red color) represents the optimal path maximizing the expected outcome value? Value, $ 30 0.9 D3 0.4 Investment 100 $-50 0.1 0.6 50 DI S-80 500 90 0.1 D1 500 $-80 90 Value $ 0.3 150 $-25 0.3 -30 0.4 75 0.5 200 D2$-30- 0.5 -100 $-35 50 O a. A O b. B O c. C O d. D O e. E O f. F
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- A common decision is whether a company should buy equipment and produce a product in house or outsource production to another company. If sales volume is high enough, then by producing in house, the savings on unit costs will cover the fixed cost of the equipment. Suppose a company must make such a decision for a four-year time horizon, given the following data. 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.The Tinkan Company produces one-pound cans for the Canadian salmon industry. Each year the salmon spawn during a 24-hour period and must be canned immediately. Tinkan has the following agreement with the salmon industry. The company can deliver as many cans as it chooses. Then the salmon are caught. For each can by which Tinkan falls short of the salmon industrys needs, the company pays the industry a 2 penalty. Cans cost Tinkan 1 to produce and are sold by Tinkan for 2 per can. If any cans are left over, they are returned to Tinkan and the company reimburses the industry 2 for each extra can. These extra cans are put in storage for next year. Each year a can is held in storage, a carrying cost equal to 20% of the cans production cost is incurred. It is well known that the number of salmon harvested during a year is strongly related to the number of salmon harvested the previous year. In fact, using past data, Tinkan estimates that the harvest size in year t, Ht (measured in the number of cans required), is related to the harvest size in the previous year, Ht1, by the equation Ht = Ht1et where et is normally distributed with mean 1.02 and standard deviation 0.10. Tinkan plans to use the following production strategy. For some value of x, it produces enough cans at the beginning of year t to bring its inventory up to x+Ht, where Ht is the predicted harvest size in year t. Then it delivers these cans to the salmon industry. For example, if it uses x = 100,000, the predicted harvest size is 500,000 cans, and 80,000 cans are already in inventory, then Tinkan produces and delivers 520,000 cans. Given that the harvest size for the previous year was 550,000 cans, use simulation to help Tinkan develop a production strategy that maximizes its expected profit over the next 20 years. Assume that the company begins year 1 with an initial inventory of 300,000 cans.It costs a pharmaceutical company 75,000 to produce a 1000-pound batch of a drug. The average yield from a batch is unknown but the best case is 90% yield (that is, 900 pounds of good drug will be produced), the most likely case is 85% yield, and the worst case is 70% yield. The annual demand for the drug is unknown, with the best case being 20,000 pounds, the most likely case 17,500 pounds, and the worst case 10,000 pounds. The drug sells for 125 per pound and leftover amounts of the drug can be sold for 30 per pound. To maximize annual expected profit, how many batches of the drug should the company produce? You can assume that it will produce the batches only once, before demand for the drug is known.
- 1. Explain the meaning of the expected value of perfect information (EVPI) in this problem. Based on the results of (iii) and (iv), which investment would you choose? 2. Compute the coefficient of variation, the return-to-risk ratio (RTRR) for each investment. Based on (vii) and (viii), what investment would you choose? Compare the results of (vi) and (ix) and explain any differencesA local real estate investor in Orlando is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment. Based on the Maximax criteria, the investor should choose Investment Motel Restaurant Theater Motel Restaurant O Theater O Any of the three Shortage $-8,000 2,000 6,000 Gasoline Availability Stable Supply $15,000 8,000 6,000 Surplus $20,000 6,000 5,000You are given the following payoff table (in units of thousands of dollars) for a decision analysis problem: S1 220 S2 170 S3 A1 110 A2 200 150 180 Prior Probability 0.5 0.4 0.1 (a) Which alternative should be chosen under the maximin payoff criterion? (b) Which alternative should be chosen under the maximum likelihood criterion? (c)Which alternative should be chosen under Bayes' decision rule?
- Calculating outcomes as equally likely would BEST describe: O a. Maximax criterion O b. Laplace criterion O c. Regret criterion Od. Maximin criterion Determining the average payoff for each alternative and choosing the one with the BEST payoff is the approach called: ea, maximax O b. minimax regret O c. laplace Od maximin 2Even though independent gasoline stations have been having a difficult time. Murad has been thinking about starting her own independent gasoline station. Murad's problem is to decide how large his station would be. The annual returns will depend on both the size of his station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Murad developed the following table: Size of the first station Small Medium Large Very large Probability Good market,$ 50 000 80 000 100 000 300 000 20% Fair market,$ 20 000 30 000 30 000 25 000 30% a) what is the maximax decision? b) what is the maximin decision c) what is the equally likely decision (Laplace) d) What is the Expected Monetary Value Criterion (EMV Criterion) Poor market, $ -10 000 -20 000 -40 000 -160 000 50%n September 2012, a 260,000 square foot Costco anchored shopping center was acquired in San Mateo, California for $36 million with a $26 million fully amortizing first mortgage loan from Union Bank. By 2018, the property had substantially appreciated in value and was worth $72 million and the owner wanted to access part or all of the increased equity value while paying little or no current taxes. The owner might: Refinance the property with a larger loan All these answers are correct Sell the property under an installment sale contract Trade the property for a property whose sale price is more than $54 million under Section 1031 of the Internal Revenue Code
- 3-26 Megley Cheese Company is a small manufacturer of several different cheese products. One of the products is a cheese spread that is sold to retail outlets. Jason Megley must decide how many cases of cheese spread to manufacture each month. The probability that the demand will be six cases is 0.1, seven cases is 0.3, eight cases is 0.5, and nine cases is 0.1. The cost of every case is $45, and the price that Jason gets for each case is $95. Unfortunately, any cases not sold by the end of the month are of no value, due to spoilage. How many cases of cheese should Jason manufacture each month?Donald Harris received a windfall and needs to invest it for tax reasons. He went to his brother-in-law, Joe Harris, who is a financial advisor. Joe prepared a matrix that illustrated the possible returns on investment for different investment strategies under different economic conditions. That matrix is given below. Donald Harris reads the Wall Drive Journal and came across an article that stated that the probability that there would be a major downturn would be 10%; the probability of a downturn would be 30%; the probability of an upturn would be 40%; and that the probability of a major upturn would be 20%. Based on these numbers, what investment strategy should Donald Harris adopt? Future Air Traffic Strategies Major Downturn Downturn Upturn Major Upturn Contrarian 20% 10% 5% -15% Risk Averse 2% 4% 7% 10% Growth -10% -8% 13% 20% Aggressive -25% -20% 11% 35% Group of answer choicesProblem 1: You are a manager of CircuitTown, which sells Xbox2010. The demand for Xbox2010 in the holiday season is 200 units with probability 0.8 and 400 units with probability 0.2. You have to take an order from MSFT in advance. You can either purchase 200 units or 400 units. The purchase price is $150 per unit and the retail price is $300 per unit. After the holiday, you dump unsold units to leftover.com with price $50 per unit. Build a decision tree and decide how many units you want to order. Problem 2: You have taken over as inventory manager at Dino’s Florists. You would like to use EOQ to compute the best quantity of orchids to order. The previous manager at Dino’s ordered orchids once a month in quantities of 1,000 to simply match the monthly demand. Orchids are expensive to order with an ordering cost of $300 per order. Holding cost is estimated at 15% of product cost annually, with a product cost of $60 per unit. a. What is economic order quantity decision for Dino’s…