Reference no: EM133201934
Assignment:
Decision Analysis Case Study
Problem Statement
Jim Kelly, a corporate raider, has acquired a textile company and is contemplating the future of one of its major plants, located in Downtown Silver Spring, Maryland. Three alternatives decisions are being considered: (1) expand the plant and produce and produce lightweight, durable materials for possible sales to the military, a market with little foreign competition; (2) maintain the status quo at the plant, continuing production of textile goods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first two alternatives is chosen, the plant will still be sold at the end of a year. The amount of profit that could be earned by selling the plant in a year depends on foreign market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this decision.
|
State of Nature
|
Decision
|
Good Foreign Competitive Conditions
|
Poor Foreign Competitive Condition
|
Expand
|
$900,000
|
$600,000
|
Maintain status quo
|
1,400,000
|
-150,000
|
Sell now
|
420,000
|
420,000
|
a. Determine the best decision by using the following criteria:
1. Maximax
2. Maximin
3. Minimax regret
4. Huwicz (α = 0.3)
5. Equal likelihood
b. Assume that it is now possible to estimate a probability of 0.70 that good foreign competitive conditions will exist and a probability of 0.30 that poor conditions will exist. Determine the best decision by using expected value and expected opportunity loss.
c. Compute the expected value of perfect information
d. Develop a decision tree, with expected values at the probability nodes.