Question 1 Assume that you are the team leader of strategic planning and advisory board of M/S XYZ company. The company has decided to enter the market with a new electronic product. Your team conducted a marker research and presented the following two strategies along with the necessary data. Delete Strategy A: Build a large plant with an estimated cost of 20,00,000 Rials. This altemative can face two states of nature on market conditions: High demand with a probability of 0.70, or a low demand with a probability of 0.30. If the demand is high, the company can expect to receive an annual revenue of 5,00,000 Rials for 7 years. If the demand were low the annual revenue would be only 1,00,000 Rials. Strategy B: Build a small plant with an estimated cost of 10,00,000 Rials. This alternative also faces two states of nature: High demand with a probability of 0.70, or a low demand with a probability of 0.30,If the demand is high the company can expect to receive an annual revenue of 3,00,000 per annum for two years and if the demand is low the annual revenue would be 1,50,000 per annum. If the demand is low and remains low for 2 years, the plant is not expanded. However, if initial demand is high and remains high decision of whether or not to expand the plant. It is assumed that the cost of expanding the plant at that time is 15,00,000 Rials. Further, it is assumed that after this second decision the probabilities of high and low demand remains the same. After expansion, if the demand is high then the company can expect to receive an annual revenue of 6 Lakhs per annum or if the demand is low and if the demand were low the annual revenue would be only 1,00,000 per annum. Draw a decision tree with decision nodes and explain the management and suggest the best strategy out these two with proper justification.
Question 1 Assume that you are the team leader of strategic planning and advisory board of M/S XYZ company. The company has decided to enter the market with a new electronic product. Your team conducted a marker research and presented the following two strategies along with the necessary data. Delete Strategy A: Build a large plant with an estimated cost of 20,00,000 Rials. This altemative can face two states of nature on market conditions: High demand with a probability of 0.70, or a low demand with a probability of 0.30. If the demand is high, the company can expect to receive an annual revenue of 5,00,000 Rials for 7 years. If the demand were low the annual revenue would be only 1,00,000 Rials. Strategy B: Build a small plant with an estimated cost of 10,00,000 Rials. This alternative also faces two states of nature: High demand with a probability of 0.70, or a low demand with a probability of 0.30,If the demand is high the company can expect to receive an annual revenue of 3,00,000 per annum for two years and if the demand is low the annual revenue would be 1,50,000 per annum. If the demand is low and remains low for 2 years, the plant is not expanded. However, if initial demand is high and remains high decision of whether or not to expand the plant. It is assumed that the cost of expanding the plant at that time is 15,00,000 Rials. Further, it is assumed that after this second decision the probabilities of high and low demand remains the same. After expansion, if the demand is high then the company can expect to receive an annual revenue of 6 Lakhs per annum or if the demand is low and if the demand were low the annual revenue would be only 1,00,000 per annum. Draw a decision tree with decision nodes and explain the management and suggest the best strategy out these two with proper justification.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 1
Assume that you are the team leader of strategic planning and advisory board of M/S
XYZ company. The company has decided to enter the market with a new electronic
product. Your team conducted a marker research and presented the following two
strategies along with the necessary data. Delete Strategy A: Build a large plant with an
estimated cost of 20,00,000 Rials. This altemative can face two states of nature on market
conditions: High demand with a probability of 0.70, or a low demand with a probability
of 0.30. If the demand is high, the company can expect to receive an annual revenue of
5,00,000 Rials for 7 years. If the demand were low the annual revenue would be only
1,00,000 Rials. Strategy B: Build a small plant with an estimated cost of 10,00,000 Rials.
This alternative also faces two states of nature: High demand with a probability of 0.70,
or a low demand with a probability of 0.30,If the demand is high the company can expect
to receive an annual revenue of 3,00,000 per annum for two years and if the demand is
low the annual revenue would be 1,50,000 per annum. If the demand is low and remains
low for 2 years, the plant is not expanded. However, if initial demand is high and remains
high decision of whether or not to expand the plant. It is assumed that the cost of
expanding the plant at that time is 15,00,000 Rials. Further, it is assumed that after this
second decision the probabilities of high and low demand remains the same. After
expansion, if the demand is high then the company can expect to receive an annual
revenue of 6 Lakhs per annum or if the demand is low and if the demand were low the
annual revenue would be only 1,00,000 per annum. Draw a decision tree with decision
nodes and explain the management and suggest the best strategy out these two with
proper justification.
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