Determine the best decision based on the optimistic decision making approach. Decision d1 d2 d3 State of Nature s2 28 17 40 $1 -5 19 3 s3 50 15 6
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![Suppose we are interested in investing in one of three investment opportunities: d1, d2, or d3.
The following profit payoff table shows the profits (in thousands of dollars) under each of the 3
possible economic conditions: s1, s2, and s3.
Determine the best decision based on the optimistic decision making approach.
d2
Od2 or d1
O d2 or d3
O di
d3
Decision
d1
d2
d3
State of Nature
s2
28
17
40
s1
-5
19
3
s3
50
15
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- Play Things is developing a new Lady Gaga doll. The company has made the following assumptions: The doll will sell for a random number of years from 1 to 10. Each of these 10 possibilities is equally likely. At the beginning of year 1, the potential market for the doll is two million. The potential market grows by an average of 4% per year. The company is 95% sure that the growth in the potential market during any year will be between 2.5% and 5.5%. It uses a normal distribution to model this. The company believes its share of the potential market during year 1 will be at worst 30%, most likely 50%, and at best 60%. It uses a triangular distribution to model this. The variable cost of producing a doll during year 1 has a triangular distribution with parameters 15, 17, and 20. The current selling price is 45. Each year, the variable cost of producing the doll will increase by an amount that is triangularly distributed with parameters 2.5%, 3%, and 3.5%. You can assume that once this change is generated, it will be the same for each year. You can also assume that the company will change its selling price by the same percentage each year. The fixed cost of developing the doll (which is incurred right away, at time 0) has a triangular distribution with parameters 5 million, 7.5 million, and 12 million. Right now there is one competitor in the market. During each year that begins with four or fewer competitors, there is a 25% chance that a new competitor will enter the market. Year t sales (for t 1) are determined as follows. Suppose that at the end of year t 1, n competitors are present (including Play Things). Then during year t, a fraction 0.9 0.1n of the company's loyal customers (last year's purchasers) will buy a doll from Play Things this year, and a fraction 0.2 0.04n of customers currently in the market ho did not purchase a doll last year will purchase a doll from Play Things this year. Adding these two provides the mean sales for this year. Then the actual sales this year is normally distributed with this mean and standard deviation equal to 7.5% of the mean. a. Use @RISK to estimate the expected NPV of this project. b. Use the percentiles in @ RISKs output to find an interval such that you are 95% certain that the companys actual NPV will be within this interval.If you want to invest in a project that cost $3.5 million. As we are unsure about the future demand, there is a 40% probability of high demand with a present value for the project $3 million. There is a 25% probability of moderate demand with a present value of $2.5 million. In addition, there is a 35% probability of low demand with a present value is $1.5 million. Draw a decision tree for this problem. What is the expected net present value of the business? Should you invest? Explain. Assume that you can expand the project by investing another $0.6 million after you learn the true future demand state. This would make the present value of the business $3.9 million in the high‐demand state, $3.5 million in the moderate demand state, and $1.80 million in the low demand state. Draw a decision tree to reflect the option to expand. Evaluate the alternatives. What is the net present value of the business if you consider the option to expand? How valuable is the option to expand?Given the decision tree below, determine which alternative should be purchase given the probability of poor and good economic conditions. Explain your answer.
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- 1. If today stock is trading for $60 a share. You are confident that the stock price will experience a change in the value of over 30% relative to the current price in either upward or downward direction over the course of next year. Today you decide to transact in either one or two stocks maturing in one year. The strike price of both options is $60 a share. The call option premium is $6 and put option premium is $5. Given this information and your belief, you should _______. a. buy 2 calls b. buy 1 call and sell 1 put c. sell 1 call and 1 sell put d. buy 1 call and buy 1 put e. sell 2 puts Please explainUse the table below to answer the questions that follow and caculate the Expected Monetary Value(EMV) of the different outcomesDECISION TABLE WITH CONDITIONAL VALUESSTATE OF NATUREFAVORABLE OUTCOME UNFAVORABLE OUTCOMEALTERNATIVES ($) ($)Start a big Company 2,000,000 -500,000Start a small company 800,000 -200,000Build Nothing 0 0Probabilities 0.3 0.7Calculate the following The EMV Maximin criterion Maximax criterion Minimax criterionYour company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows Decision High Low Introduce $4,000,000 -$2,000,000 Do Not Introduce 0 0 Probability 0.3 0.7 You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results Result High Low Predicts High 0.4 0.1 Inconclusive 0.4 0.5 Predicts Low 0.2 0.4 c) Draw the complete decision tree, including the survey option. Explain where the values on the decision tree come from
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