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ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Instructions Problem: A farmer specializing in alfalfa is experiencing a substantial backlog, and his company is considering three courses of action: A) Produce a new product B) Continue producing alfalfa (no change) C) Do not produce-keep money in bank saving (annual interest rate at 3%) The farmer has $100,000 equity for investment. His/her choice depends on initial investment and demand, which may be 40% high or 60% low. Given the payoffs, create and solve this problem using a decision tree. The farmer estimates the profits when choosing from the three alternatives (A, B, and C) under different probable levels of demand. The cost on the investment is also included in the table as the initial event node. These costs profits, in thousands of dollars, and interest rate, in percentage, are presented in the table below: Event Node 1 Event Node 2 A B C Probability Initial Low High Investment Cost Demand Demand -5 28 -2 19 3% 3% 0.6 0.4 -5 -3 0 1
Transcribed Image Text:Instructions Problem: A farmer specializing in alfalfa is experiencing a substantial backlog, and his company is considering three courses of action: A) Produce a new product B) Continue producing alfalfa (no change) C) Do not produce-keep money in bank saving (annual interest rate at 3%) The farmer has $100,000 equity for investment. His/her choice depends on initial investment and demand, which may be 40% high or 60% low. Given the payoffs, create and solve this problem using a decision tree. The farmer estimates the profits when choosing from the three alternatives (A, B, and C) under different probable levels of demand. The cost on the investment is also included in the table as the initial event node. These costs profits, in thousands of dollars, and interest rate, in percentage, are presented in the table below: Event Node 1 Event Node 2 A B C Probability Initial Low High Investment Cost Demand Demand -5 28 -2 19 3% 3% 0.6 0.4 -5 -3 0 1
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