[Solution]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…

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

 

Determine the best decision by using the following criteria:
Maximax
Maximin
Minimax regret
Huwicz (α = 0.3)
Equal likelihood
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.
Compute the expected value of perfect information
Develop a decision tree, with expected values at the probability nodes.

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