Decision Analysis, Finance Basics

2 Questions

QUESTION #1
LAPTOP SELECTION

Jonna is in market to buy a new laptop. Six different machines are under consideration. All laptops are essentially the same, but they vary in price and reliability. The least expensive model is also the least reliable, the most expensive is the most reliable, and the others are in between. The laptops are described as follows:

A Price $1260 Expected number of days in the shop per year = 5.5
B Price $1750 Expected number of days in the shop per year = 2
C Price $860 Expected number of days in the shop per year = 8
D Price $1575 Expected number of days in the shop per year = 3.5
E Price $1525 Expected number of days in the shop per year = 2.5
F Price $1245 Expected number of days in the shop per year = 4



The laptop will be an important part of Jonna’s livelihood for the next two years. (After two years, the laptop will have a negligible salvage value.) In fact, Jonna can foresee that there will be specific losses if the laptop is in the shop for repairs. The magnitude of the losses are uncertain but are estimated to be approximately $175 per day that the laptop is down.

a. Can you give any advice to Jonna without doing any calculations? (Maximum four line answer, No calculation, No graph required)
b. Use the information given to determine weights KP and KR, where R stands for ‘reliability’ and P stands for ‘price’.
c. Calculate overall utilities for the laptops, What do you conclude?
d. What consideration other than losses might be important in determining the trade off rate between cost and reliability? List at least three of them.
(Please show all the steps)

Question 2:

QUESTION 2
HELP – THE BETTOR (Calculation required 4 decimal places, Objective: Maximization of wealth)

A utility function is called Linear-plus-exponential when it contains both linear and exponential terms.

Brigg, a bettor, has a choice between the following two alternatives:
(For simplicity it is assumed that cost of each alternative is negligible, equivalent to zero)

Alternative # A 5% chances to WIN $11,900
95% chances to WIN $1200

Alternative # B 90% chances to WIN $2100
10% chances to LOSE $2150


If Brigg has $3,000, having utility function U(x) = ln(x) – 0.0005x, where x is total wealth which Alternative he should choose A or B?

If Brigg has $6,000, having utility function U(x) = ln(x) – 0.0005x, where x is total wealth which Alternative he should choose A or B?

If Brigg has $12,000, having utility function U(x) = 0.0015x -12.48e-x/13420, where x is total wealth which Alternative he should choose A or B?

If bettor is not risk neutral and having utility function U(x) = 1.75 - e-x/13420 what will be your recommendation, Alternative A or B. Calculate Risk premium for Alternative A and B independently? Which Alternative will give high certainty value to Brigg? Assume Brigg is risk neutral, what will be your recommendation among the alternatives?

NOTE :
(MUST calculate at least 4 decimal places otherwise you may not choose correct alternative and marks will be deducted.) (It is advisable to use Excel)
Posted Date: 7/18/2012 6:57:05 AM | Location : United States







Related Discussions:- Decision Analysis, Assignment Help, Ask Question on Decision Analysis, Get Answer, Expert's Help, Decision Analysis Discussions

Write discussion on Decision Analysis
Your posts are moderated
Related Questions
Which depreciation method would produce the higher NPV and how much higher would it be?


What is the Execution of order in the Stock Exchange When broker receives the margin money and is clear about the order received by him, he puts details in the 'order book'.

Compute the Payback Period - Example Cedes restriction has the following details of two (2) of the future production plans. Just one of these machines will be purchased and su

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% f

The operating profit (EBIT) of ABC Ltd is Rs. 1,60,000. Its capital structure consists of the following: 10% Debentures Rs. 500000 12% Preference Shares 1

Growth rate : The average of PC manufacturing industry growth rate was 22.24% for 2004, 20% for 2005, and 17.29% for 2006. It showed that the industry's growth rate has been declin

Accounting Rate of Return Method or ARR This method utilizes accounting profits from financial status to assess the viability of investment proposal via diving the average inc

I am facing some problems in my assignment of Performance Review in finance. Can anybody suggest me the proper explanation for it?

You are taking an investment in the common stock of Crisp's Cookware. The stock is expected to pay a dividend of $2.00 a share at the end of the year (D1=2.00). The stock has a bet