Key considerations as Allied develops its strategy for disposingof the case are
ID: 2952960 • Letter: K
Question
Key considerations as Allied develops its strategy for disposingof the case are the probabilities associated with John’sresponse to an Allied counteroffer of $400,000 and theprobabilities associated with the three possible trial outcomes.John will accept a counteroffer of $400,000 is 0.10, John willreject the counteroffer of $400,000 is 0.40, and John will make acounteroffer of $600,000 is 0.50. If the case goes to court, theybelieve the jury will award John damages of $1,500,000 is 0.30,award John damages of $750,000 is 0.50 and the probability the jurywill award John nothing is 0.20.
1.) Make a decision tree
2.) A recommendation regarding whether Allied should acceptJohn’s offer to settle the claim for $750,000.
3.) A decision strategy that Allied should follow if they decideto make John a counteroffer of $400,000.
4.) A risk profile for your recommended strategy.
Explanation / Answer
1.) Make a decision tree
P=.10, expected value= $400,000
P=.04 reject $400,000 the tree is
0.4 x 0.3 = .12 $1,500,000 EV = .3 x 1500000=450000
0.4 x 0,5 = .20 $750,000 EV = .5x750000=3750000
0.4 x 0.2 =0.08 $0
THE EXPECTED VALUE OF THE JURY OUTCOME IS 450000 + 375000=825,000
P=0.5 $600,000
2.) A recommendation regarding whether Allied should acceptJohn’s offer to settle the claim for $750,000.
YES, the expected cost is higher at trial
3.) A decision strategy that Allied should follow if they decide tomake John a counteroffer of $400,000.
accept offers below 825000
4.) A risk profile for your recommended strategy.
major risk is 1500000 verdict
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