Concept explainers
a)
To determine: The sensitivity to the problem in terms of the probability estimate of 0.35.
Introduction: Decision making is the procedure of selecting choices by identifying a decision, obtaining information and evaluating alternative resolutions. Always, step-by-step decision making process can help to make more deliberate, and thoughtful decisions in the organization.
a)
Answer to Problem 8P
Explanation of Solution
Given information:
It is given that the lease of theme part is about to expire. The management should decide whether to renew the lease for another 10 years or relocate the motel. The details about the two alternatives are as follows:
| Options | Motel approved | Motel rejected |
| Renew | $500,000 | $4,000,000 |
| Relocate | $5,000,000 | $100,000 |
Determine the sensitivity of the problem:
The graph shown below contains the range of values of probability of approved motel where the alternative is optimal:
If the value is low, renewal is best with the highest expected value.
If the value is high, relocate is best with the highest expected value
Slope of renew:
Equation for renew:
Slope of relocate:
Equation for renew:
Determine the intersection between two lines:
It can be determined by equaling the equations of renew and relocate.
Optimal ranges are as follows:
Renew:
Relocate:
b)
To determine: The sensitivity to the problem in terms of the probability estimate of 0.45.
Introduction: Decision-making is the process that helps to make decision. It is the process of choosing a best alternative by evaluating many alternatives.
b)
Answer to Problem 8P
Explanation of Solution
Given information:
It is given that the lease of theme part is about to expire. The management should decide whether to renew the lease for another 10 years or relocate the motel. The details about the two alternatives are as follows:
| Options | Motel approved | Motel rejected |
| Renew | $500,000 | $4,000,000 |
| Relocate | $5,000,000 | $100,000 |
Determine the sensitivity of the problem:
The graph shown below contains the range of values of probability of approved motel where the alternative is optimal:
If the value is low, renewal is best with the highest expected value.
If the value is high, relocate is best with the highest expected value
Slope of renew:
Equation for renew:
Slope of relocate:
Equation for renew:
Determine the intersection between two lines:
It can be determined by equaling the equations of renew and relocate.
Optimal ranges are as follows:
Renew:
Relocate:
Conclusion: It is given that the percentage is 0.45 which is less than .4643. Hence, renew should be selected.
c)
To determine: The range of payoff for renew reject for the selected alternative.
Introduction: Decision-making is the process that helps to make decision. It is the process of choosing a best alternative by evaluating many alternatives.
c)
Answer to Problem 8P
Explanation of Solution
Given information:
It is given that the lease of theme part is about to expire. The management should decide whether to renew the lease for another 10 years or relocate the motel. The details about the two alternatives are as follows:
| Options | Motel approved | Motel rejected |
| Renew | $500,000 | $4,000,000 |
| Relocate | $5,000,000 | $100,000 |
The estimated payoff except for $4 million and the probability of approval is 0.35.
Determine the payoff:
Renew:
X should be plugged in instead of 4,000,000 in the above equation
Relocate:
Equal the equations of renew and relocate to solve x:
Equations of renew and relocate should be equaled to determine the value of x.
The original decisions at payoff is $4,000,000 should be decreased to $2,523,077 for the decision to change from renew to relocate.
When x is $2,523,077, there would be indifference between renew and relocate.
When x is less than $2,523,077, the decision would be changed to relocate.
Want to see more full solutions like this?
Chapter 5 Solutions
Operations Management (McGraw-Hill Series in Operations and Decision Sciences)
- Consider the following payoff table for three product decisions (A, B, and C) and three future market conditions (payoffs = P millions) Assume that is now possible for the company to estimate a probability of 0.40 that market condition1 will exist, 0.40 for market condition 2 and a probability of 0.20 that market condition 3 will exist in the future. Determine the best decision using expected value. Determine the expected value of perfect information (EVPI)?Determine the best decision using expected opportunity loss.arrow_forwardA firm must decide whether to construct a small, medium, or large stamping plant. A consultant’sreport indicates a .20 probability that demand will be low and an .80 probability that demand willbe high.If the firm builds a small facility and demand turns out to be low, the net present value will be$42 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $42 million or expand greatly for a net present value of $48 million.The firm could build a medium-size facility as a hedge: If demand turns out to be low, its netpresent value is estimated at $22 million; if demand turns out to be high, the firm could do nothingand realize a net present value of $46 million, or it could expand and realize a net present value of$50 million.If the firm builds a large facility and demand is low, the net present value will be – $20 million,whereas high demand will result in a net present value of $72 million.a. Analyze this problem using a decision…arrow_forwardThe 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.arrow_forward
- Peter Martin will help his brother who wants to open a grocery store. Peter initially believes there is a 50-50 chance that his brother's food store will be successful. Peter is considering doing market research. Based on historical data, there is a 0.8 probability that the market research will be favorable given a successful store. Furthermore, there is a 0.7 probability that the market research will be unfavorable given an unsuccessful store. a) If the market research is favorable, what is Peter's revised probability of a successful store for his brother?b) If the market survey is unfavorable, what is Peter's revised probability of a successful store for his brother?c) If the initial probability of a successful store is 0.60 (instead of 0.50), find the probabilities of (a) and (b).arrow_forwardEunice, in The scenario, wants to determine how each of the 3 companies will decide onpossible new investments. He was able to determine the new investment pay off for eachof the three choices as well as the probability of the two types of market. If a company willlaunch product 1, it will gain 125,000 if the market is successful and lose 125,000 if themarket is a failure. If a company will launch product 2, it will gain 75,000 if the market issuccessful and lose 75,000 if the market will fail. If a company decides not to launch anyof the product, it will not be affected whether the market will succeed or fail. There is a53% probability that the market will succeed and 47% probability that the market will fail.What will be the companies decision based on EMV? What is the decision of eachcompany based on expected utility value?arrow_forwardA small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the tablebelow. Which alternative should be selected if the decision criterion is:a. Maximax?b. Maximin?c. Laplace?d. Minimax regret?NEXT YEAR’SDEMANDAlternative Low HighDo nothing $50* $60Expand 20 80Subcontract 40 70arrow_forward
- 1) A television network earns an average of $1.6 million each season from a hit program and loses an averageof $400,000 each season on a program that turns out to be a flop, and of all programs picked up by thisnetwork in recent years, 25% turn out to be hits and 75% turn out to be flops. a) Construct a decision tree to help the television network identify the strategy that maximizes itsexpected profit in responding to a newly proposed television program. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities. b) What should the network do? What is their expected profit? c) The network can conduct market research to determine whether a program will be a hit or a flop. Ifthe market research report is perfectly reliable, what is the most the network should be willing to payfor it? 2) A buyer for a large sporting goods store chain must place orders for professional footballs with the footballmanufacturer six months prior to the time…arrow_forwardA business owner is planning to strategize his company's growth. He can either buy, rent, or lease a new factory depending on how the business is doing. He was given the following payoff table based on whether the business is doing good or business is slow. Alternative Business Doing Good Business is Slow Buy 90 -10 Rent 70 40 Lease 60 55 The probability of business doing good is 0.7 and the probability of slow business is 0.3. Using Laplace's method, the strategy is:arrow_forwardAt the beginning of each day, a patient in the hospital is classifed into one of the three conditions: good, fair or critical. At the beginning of the next day, the patient will either still be in the hospital and be in good, fair or critical condition or will be discharged in one of three conditions: improved, unimproved, or dead. The transistion probabilities for this situation are Good Fair Critical Good 0.65 0.20 0.05 Fair 0.50 0.30 0.12 Critical 0.51 0.25 0.20 Improved Unimproved Dead Good 0.06 0.03 0.01 Fair 0.03 0.02 0.03 Critical 0.01 0.01 0.02 For example a patient who begins the day in fair condition has a 12% chance of being in critical condition the next day and a 3%…arrow_forward
- A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40, 0.35, and 0.25, respectively. A small facility is expected to earn an after-tax net present value of just $13,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $50,000 or to large size to earn $100,000. A medium-sized facility is expected to lose an estimated $50,000 if demand is low and earn $100,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $125,000; it can be expanded to a large size for a net payoff of $175,000. If a large facility is built and demand is high, earnings are expected to be $180,000. If demand is average for the large…arrow_forwardHoward 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 $100,000 a) Expected value for the Add Assembly Line option=$____arrow_forwardHyewon Kim owns her own catering business. She continually monitors her other expense costs, including the cost of liability insurance for drivers of her catering vans. This year, Hyewon’s auto insurer advises her that insurance rates for her coverage will increase by 15 percent next year. The insurance company also states that if Hyewon will institute a preemployment drug-testing program for those employees who will drive her vans, there will be no insurance rate increase. Hyewon does not currently require potential employees to agree to be drug-tested prior to becoming employed in her business, but it is legal to do so in her state. What should Hyewon tell potential employees about her reason for implementing a preemployment drug-testing program? What should she do if a potential employee refuses to agree to the test?arrow_forward
Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,