Reference no: EM131269490
Question 1. Kalypo, Inc., is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Kalypo's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized is summary in the table below. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility.
|
State of Nature
|
High Demand
|
Medium Demand
|
Low Demand
|
|
Probability
|
0.50
|
0.30
|
0.20
|
|
Projected Profit($)million
|
$59
|
$45
|
$35
|
a. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy?
b. What must the selling price be for the company to consider selling the rights to the product?
c. Develop a risk profile for the optimal strategy.
Question 2. The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars).
State of Nature
Low Demand Medium Demand High Demand
Decision Alternativess1 s2 s3
Manufacture, d1-20 40 100
Purchase, d2 10 45 70
The state-of-nature probabilities are P (s1) = .35, P (s2) = .40, and P (s3) =.25.
a. Draw the decision tree associated with this problem.
b. What is Gorman's optimal decision strategy?What is the expected value of this strategy?
c. Develop a risk profile for the optimal strategy.
d. Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.
Question 3. Dantey Development Corporation is considering bidding on a contract for a new office building complex. Dantey's Company must decide whether to bid on the contract or not. The cost of preparing the bid is $200,000. Based on past experience the company has a 0.80 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2,000,000 to become a partner in the project. Dantey Company will consider doing a market research study to forecast demand for the office units prior to beginning construction if the company wins the contract. The cost of this study is $150,000. The possible outcomes of the market research study can either be high or moderate forecasts. The likelihood of high forecast is 0.60. Dantey CEO must decide either to build the office complex or sell the rights in the project to another developer upon wining the contract whether the market research study was conducted or not. The decision to build the complex will result in an income of $5,000,000 if demand is high and $3,000,000 if demand is moderate. If Dantey chooses to sell its rights in the project to another developer, income from the sale is estimated to be $3,500,000. Past experience has shown that there is 0.85 probability of high demand if the complex is built and forecast is high. Similarly, there is 0.225 chance of high demand if the office complex is built and forecast is moderate. If no market research exists then the probability of high demand is estimated to be 0.60.
a. Develop a decision tree for the Dantey Development Company problem.
b. What is the optimal decision strategy for Dantey, and what is the expected value for this project?
c. What would the cost of the market research study have to be before Dante would change its decision about conducting the study?
|
We have all been part of many teams
: We've all been part of many teams. Share with the class a bit about a team you recall being a part of that was a positive experience. It can be a team that was together for a very short time or years. What factors do you recall that made it such a..
|
|
Learning activity-prescription for success
: Dewey Cheatham is the new Vice President of Marketing for a large online search engine company, Pottstown Innovative Enterprises (AKA, PIE). Dewey has been doing some research into how he can increase the Company’s revenues and thereby really impress..
|
|
Identify two people you would like to interview to get views
: Write two two-tailed hypotheses that relate two variables in which you have an interest in exploring. For each hypothesis, you should use different variables. Identify two people you would interview to get views relevant to the research question,..
|
|
Describe and define internal and external analysis
: Describe and define internal and external analysis. Describe and define the responsibilities and duties of the Strategic Manager. Explain why companies need strategic management planning.
|
|
Develop a risk profile for the optimal strategy
: What must the selling price be for the company to consider selling the rights to the product - develop a risk profile for the optimal strategy.
|
|
Why might you need to analyse cash flow trends
: BSBFIM601 - Manage finances Assignment. Why should you identify your business' or industries critical dates? Why might you need to analyse cash flow trends? Why do you need to be aware of your tax liabilities? Why is it important to ensure that your..
|
|
Expand the project concept to make a plan for the project
: For the project assignment you will expand the project concept to make a plan for the project. This document is the thing that tells me what your project is, why you are doing it and how you will manage it.
|
|
When revising this part of your compensation plan
: You just finished analyzing information for the current compensation and benefits program. You find that some changes should be made, as the majority of employees (you have 120 employees) are not happy with what is being offered. What cost considerat..
|
|
Do homer and virgil narrate differently
: You may certainly use those discussions, but to write on this topic you will need to get beyond them. Other than at the beginnings, do Homer and Virgil narrate differently? Do their narrators dramatize their own roles to the same degree? Do their ..
|