Dwayne Whitten, president of Whitten Industries, is considering whether to build a manufacturing plant in north Texas. His decision is summarized in the following table: Alternatives Favorable Market Unfavorable Market Build large plant $400,000 −$300,000 Build small plant $120,000 −$15,000 Don't Build $0 $0 Market Probability 0.40 0.60

Dwayne Whitten, president of Whitten Industries, is considering whether to build a manufacturing plant in north Texas. His decision is summarized in the following table: Alternatives Favorable Market Unfavorable Market Build large plant $400,000 −$300,000 Build small plant $120,000 −$15,000 Don't Build $0 $0 Market Probability 0.40 0.60

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 31P

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Carlisle Tire and Rubber, Inc., is considering expanding production to meet potential increases in the demand for one of its tire products. Carlisle’s alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. The market for this particular tire product may expand, remain stable, or contract. Carlisle’s marketing department estimates the probabilities of these market outcomes to be 0.25, 0.35, and 0.40, respectively. The file P06_31.xlsx (picture of given excel file is attached) contains Carlisle’s payoffs and costs for the various combinations of decisions and outcomes. Identify the strategy that maximizes this tire manufacturer’s expected profit. Perform a sensitivity analysis on the optimal decision, letting each of the monetary inputs vary one at a time plus or minus 10% from its base value, and summarize your findings. Which of the inputs appears to have the largest effect on the best solution?
Suppose you have a choice of three projects to choose from. Here the expected profits from these projects under the following economic scenarios: Project Poor/Fair Moderate/Stable Strong/Booming A -200 $400 $700 B -700 600 1200 C 100 500 900 Now suppose the probability of a Poor/Fair economy is 25%, a Moderate/Stableeconomy is 45% and there is a 30% chance for a Strong/Booming economy.A) Setup a decision tree.B) Determine the expected value (EV) for each project. What project shouldbe selected based on the expected value approach? Why?C) Determine the expected value with perfect information about the states ofnature?D) Determine the expected value without perfect information about the states ofnature?E) Determine the expected value of perfect information.
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An oil company must decide whether or not to drill an oil well in a particular area that they already own. The decision maker (DM) believes that the area could be dry , reasonably good or a bonanza. See data in the table which shows the gross revenues for the oil well that is found. Decision Dry (D) Reasonably good(G) Bonanza(B) Drill $0 $85 $200 m Abandon $0 $0 $0 Probability 0.3 0.3 0.4 Drilling costs 40M. The company can take a series of seismic soundings ( at a cost of 12M) to determine the underlying geological structure. The results will be either “no structure”, “open structure or “closed structure”. The reliability of the testing company is as follows that is, this reflects their historical performance. Note that if the test result is “no structure” the company can sell the land to a developer for 50 m, otherwise (for the other results) it can abandon the drilling idea at no benefit to itself.…
The CEO of Lucky Petroleum Co. has been considering to open a new gasoline statioin. He must decide how large the station should be. The annual returns (IDR billions) will depend on both the size of the station and market factor. After a careful analysis he developed the following table: Size of Station Good Market Fair Market Poor Market Small 50 20 -10 Medium 70 30 -20 Large 100 50 -30 Probability 0.5 0.3 0.2 Compute the expected value of each alternative size of station, and select the best decision. Construct the opportunity loss table and determine the best decision. Compute the expected value of perfect information.
Zaki has been thinking about starting his own petrol station. He’s problem is to decide how large his petrol station should be. The annual return that will be achieved depends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: (Business Quantitative Analysis) Determine using the best investment using the following decision criteria: a) Maximax criterion b) Maximin criterion c) Equally Likely criterion d) Minimax Regret criterion The probabilities of good market, average market, and poor market are 0.4, 0.5, and 0.1 respectively. Construct an expected opportunity loss table. Using minimum EOL as the decision criterion, determine the best alternative
In the environment of increased competition, a fitness club executive is considering the purchase of additional equipment. His alternatives, outcomes, and payoffs (profits) are shown in the following table: (a). If the executive is an optimistic decision maker, which alternative will he likely choose? (b). if the executive is a pessimistic decision maker, which alternative will he likely choose? (c). Market research suggests the chance of a favorable market for fitness clubs is 76%. If the executive uses this analysis, which alternative will he likely choose? I have provided the data table for the problem.
In the environment of increased competition, a fitness club executive is considering the purchase of additional equipment. His alternatives, outcomes, and payoffs (profits) are shown in the following table: (a). If the executive is an optimistic decision maker, which alternative will he likely choose? (b). if the executive is a pessimistic decision maker, which alternative will he likely choose? (c). Market research suggests the chance of a favorable market for fitness clubs is 76%. If the executive uses this analysis, which alternative will he likely choose? Please provide an excel sheet with calculations as well
A firm that plans to expand its product line must decide whether to build a small or a large facilityto produce the new products. If it builds a small facility and demand is low, the net present valueafter deducting for building costs will be $400,000. If demand is high, the firm can either maintainthe small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000.If a large facility is built and demand is high, the estimated net present value is $800,000. If demandturns out to be low, the net present value will be – $10,000.The probability that demand will be high is estimated to be .60, and the probability of low demandis estimated to be .40.a. Analyze using a tree diagram.
A firm that plans to expand its product line must decide whether to build a small or a large facilityto produce the new products. If it builds a small facility and demand is low, the net present valueafter deducting for building costs will be $400,000. If demand is high, the firm can either maintainthe small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000.If a large facility is built and demand is high, the estimated net present value is $800,000. If demandturns out to be low, the net present value will be – $10,000.The probability that demand will be high is estimated to be .60, and the probability of low demandis estimated to be .40. 1- Compute the EVPI 2- Determine the range over which each alternative would be best in terms of the value of P ( low demand )

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Alternatives	Favorable Market	Unfavorable Market
Build large plant	$400,000	−$300,000
Build small plant	$120,000	−$15,000
Don't Build	$0	$0
Market Probability	0.40	0.60