The meaning of the two numbers and certainty equivalent of the safer decision. Decision making under uncertainty: The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

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Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

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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?

Your 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

Identify each of the following examples as a programmed or nonprogrammed decision. Example Determining when to pay taxes Determining whether or not to ground an entire fleet of airplanes after one similar airplane has had an accident Identify the order in which the following steps are taken in the decision-making process. Step Monitoring the outcomes of a decision to see if it meets its objective Gathering information relevant to the problem Recognizing the problem Selecting the alternative that best meets the decision objective Listing and evaluating alternative courses of action Implementing the decision Identifying the objective of the decision Order 7 2 ▼ 1 ▼ 5 ▼ 4 ▼ 6 3 ▼ Programmed Decision Nonprogrammed Decision

Answer 2

Question

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Expert Solution & Answer

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Answer 3

Question

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 4

Question

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Answer 6

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Answer 7

Chapter 9, Problem 72P

Summary Introduction

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Answer 8

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Answer 9

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Answer 10

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Answer 11

Ch. 9.2 - Prob. 1P Ch. 9.2 - Prob. 2P Ch. 9.2 - Prob. 3P Ch. 9.3 - Prob. 4P Ch. 9.3 - Prob. 5P Ch. 9.3 - Prob. 6P Ch. 9.3 - Prob. 7P Ch. 9.4 - Explain in some detail how the PrecisionTree...Ch. 9.4 - Prob. 9P Ch. 9.4 - Prob. 10P

The meaning of the two numbers and certainty equivalent of the safer decision. Decision making under uncertainty: The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Solution Summary: The author explains the meaning of numbers and the certainty equivalent of the safer decision. The expected monetary value is a weighted combination of possible gains and losses.

Concept explainers

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Want to see the full answer?

Chapter 9 Solutions

The meaning of the two numbers and certainty equivalent of the safer decision. Decision making under uncertainty: The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Solution Summary: The author explains the meaning of numbers and the certainty equivalent of the safer decision. The expected monetary value is a weighted combination of possible gains and losses.

Concept explainers

To explain: The meaning of the two numbers and certainty equivalent of the safer decision. Decision making under uncertainty: The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.

Want to see the full answer?

Chapter 9 Solutions

To explain: The meaning of the two numbers and certainty equivalent of the safer decision.

Decision making under uncertainty:

The decision-making process is made with uncertainty as to the managers who make these decisions must deal with the risk and uncertainty present in each outcome.