LEARN MORE...

Home
Documents
March 2021
9
Bba 405 online solutions

Bba 405 online solutions

Content type

User Generated

Uploaded By

Nanzn0393

Pages

Showing Page:

1/3

BBA 405 ONLINE: Management Science: Decision Making Review

Your firm is considering two investment projects, A and B. Given the budget constraints,

you must chose either A or B, but not both.

Project A will provide a net return of either $400, $500, or $600, respectively, depending on

whether there will be a recession, normal conditions, or a boom. The figures for Project B

are $150, $300, or $700, respectively.

Forecasts indicate that, given the current trends in appropriate economic indicators in the

following year the chances are 20% that a recession will occur, 60% that the economic

conditions will stay as they are, and 20% that the economy will enjoy a boom.

1. Construct a payoff table. (10 points)

ORIGINAL TABLE:

Payoff Table

Event/Condition

Recession

Normal

Boom

$ 400

$ 500

$ 600

$ 150

$ 300

$ 700

Fi(Probabilities)

0.2

0.6

0.2

2. If there were an uncertain decision situation rather than one under risk, what would

your choice be under the condition of perfect optimism, perfect pessimism, optimism

at .6, equal likelihood, and minimization of regrets? (50 points)

Item

Answer

Reason

Perfect Optimism

(MXMX)

Rank: B, A

Project B has the maximum

best possible outcome.

Project

Best

$ 600

$ 700

Perfect

Pessimism

(MXMN)

Rank: A, B

Project A has the best

outcome among the worst

payoffs

Project

Worst

$ 400

$ 150

Optimism at α=

0,6 (Hurwitz

criterion)

REAL'SM

Rank: A, B

Project A maximizes the

sum of both the maximum

and minimum weighted

payoffs.

Optimism degree-0.6

Pessimism degree-0.4

A=(600*0.6) + (400*0.4) = 520

B= (700*0.6) + (150*0.4) = 480

Showing Page:

2/3

Equal Likelihood

(Laplace rule)

Rank: A, B

Project A has the highest

expected value.

A= (400*1/3) + (500*1/3) + (600*1/3) = 500

B= (150*1/3) + (300*1/3) + (700*1/3) =383.3

Minimizing

Regret

Rank: A, B

Project A minimizes the

maximum possible regret in

case any contingencies

occur.

Project

Maximum regret

$ 600

$ 700

OVERAL CONCLUSION:

Project A will be better because it has the best outcome among the worst payoffs, maximizes the sum

of both the maximum and minimum weighted payoffs, has the highest expected value and minimizes

the maximum possible regret in case any contingencies occur.

3.What is the expected value (x) of each alternative? Which alternative must you choose from

this point of view? (10 points)

A= (400*0.2) + (500*0.6) + (600*0.2) = 500

B= (150*0.2) + (300*0.6) + (700*0.2) = 350

Rank: A, B

Investment A has the highest possible expected value.

4. Which project should be chosen on the basis of the calculation of coefficient of variation?

(20 points)

Coefficient of variation

COV =σ/ mean * 100%

Conditions

Probabilities

(p)

X*p

(X-x)

Recession

0.2

(400*0.2)=80

2000

(150*0.2)=30

8000

Normal

0.6

(500*0.6)=300

(300*0.6)=180

1500

Boom

0.2

(600*0.2)=120

2000

(700*0.2)=140

24500

X (mean)

500

350

Variance

4000

34000

Showing Page:

3/3

Unformatted Attachment Preview

BBA 405 ONLINE: Management Science: Decision Making Review Your firm is considering two investment projects, A and B. Given the budget constraints, you must chose either A or B, but not both. Project A will provide a net return of either $400, $500, or $600, respectively, depending on whether there will be a recession, normal conditions, or a boom. The figures for Project B are $150, $300, or $700, respectively. Forecasts indicate that, given the current trends in appropriate economic indicators in the following year the chances are 20% that a recession will occur, 60% that the economic conditions will stay as they are, and 20% that the economy will enjoy a boom. 1. Construct a payoff table. (10 points) ORIGINAL TABLE: Payoff Table Event/Condition Recession Normal Boom A B Fi(Probabilities) $ 400 $ 150 0.2 $ 500 $ 300 0.6 $ 600 $ 700 0.2 2. If there were an uncertain decision s ...
Purchase document to see full attachment