Reference no: EM132467620

BSV11105 - Project Risk Management - Edinburgh Napier University

Question One

Problem (a) Draw a decision tree to represent TC's problem

Problem (b) Determine the optimal policy for TC, assuming that their objective is to minimise expected costs. (Note: ignore time preferences for money.)

Question Two

Problem (a) Utility functions for the mean numbers of passengers carried and the profit have been obtained from the rail operator's Managing Director (MD), as below.

Plot the above utility functions - and provide an interpretation of the plots.

Problem (b) An elicitation session* revealed that, for the MD, mean number of passengers and profit are mutually utility independent. You are reminded that, in this case, a two-attribute utility function can be obtained from:

u(x₁, x₂) = k₁u(x₁) + k₂u(x₂) + k₃u(x₁)u(x₂) Where k₃ = 1 - k₁ - k₂

The elicitation session also revealed that k₁ = 0.9 and k₂ = 0.6, where the attribute number 1 is the mean number of passengers.

Given the above utilities, [i] determine the policy that the rail operators should undertake; and [ii] comment on your answer.

Question Three

A UK construction company has estimated their profits over the next 12 months; depending on their business development strategy (A to L) & the economic outlook. Table 1.

Problem (a) For each of (i) to (v) which option should they choose and why
i. Maximin rule
ii. Minimax regret
iii. Maximax rule
iv. Laplace equation
v. Hurwicz Rule or Principle of realism (index = 0.4)

Table 1 ; Estimated profits (£ million) dependent on economic outlook and eight options business development (A to L)

Problem (b) Which option(s) are insensitive to changes in economic outlook?

Problem (c) Plot a sensitivity analysis "spider diagram" for Options A,B, C & L.

Attachment:- Project Risk Management.rar