I am having trouble solving Problem 11 in Chapter 15 in Business Analytics (2nd
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Question
I am having trouble solving Problem 11 in Chapter 15 in Business Analytics (2nd Edition). I could use some help getting started with it. I have used the solution of Problem 10 in Chapter 12 in Business Analytics (1st Edition) as a guide to do this problem but am stuck on it. Comments, suggestions, and help would be greatly appreciated.
Safari File Edit View History Bookmarks Window Help , tD 9596 Fri 1:33 AM Q E chegg.com OD Chegg Login I Am Having Trouble Solving Problem 11 In Chapter 14 Solutions | Essentials Of Busines My Doc Chegg Study TEXTBOOK SOLUTIONS EXPERT Q&A; Search 2nd Edition 2nd Edition 14th Edition Chapter 15, Problem 11P (3 Bookmarks) Show all steps: View all solutions Phone St Build C Moderate Demand 0.15 Chegg tutors who can help right now 650 Sell 1150 Internet Sec Markct Research Jayanta 837 Moderate Demand 0.775 Forecast Moderate 650 11S0 Demand -2900 Win Contract Sell Arielle Pitzer College Engineeri 890 Bid Moderate Demand 0.4 No Markct Research 800 1300 -200 Kevin Carnegie Mellon U Sell 520 Lose Contract Do Not Bid Counseli FIND ME A TUTOR a. Verify Dante's profit projections shown at the ending branches of the decision tree by calculating the payoffs of $2,650,000 and $650,000 for first two outcomes. b. What is the optimal decision strategy for Dante, and what is the expected profit for this project? C. What would the cost of the market research study have to be before Dante would change its decision about the market research study? d. Develop a risk profile for DanteExplanation / Answer
Solution:
1.
Outcome 1
Bid ($200,000)
Contract (2,000,000)
Market Research (150,000)
High Demand 5,000,000
$2,650,000
Outcome 2
Bid ($200,000)
Contract (2,000,000)
Market Research (150,000)
High Demand 3,000,000
$650,000
EV ( Node )= (.85) ($2,650) + (.15) ($650) =$2,3505 Max (2350, 1150) =2,350
EV (node 5) = Max (2350, 1150) = 2350 Decision: Build
EV (node 9) = 0.225(2650) + 0.775(650) = 1100
EV (node 6) = Max (1100, 1150) = 1150 Decision: Sell
EV (node 10) = 0.6(2800) + 0.4(800)= 2000
EV (node 7) = Max (2000, 1300) = 2000 Decision: Build
EV (node 4) = 0.6 EV (node 5) + 0.4 EV (node 6) = 0.6(2350) + 0.4(1150) = 1870
EV (node 3) = MAX (EV (node 4), EV (node 7)) = Max (1870, 2000) = 2000 Decision:No Market Research
EV (node 2) = 0.8 EV (node 3) + 0.2 (-200) = 0.8(2000) + 0.2(-200) = 1560
EV (node 1) = MAX (EV (node 2), 0) = Max (1560, 0) = 1560 Decision: Bid on Contract
Decision Strategy: Bid on the Contract Do not do the Market Research Build the
Complex Expected Value is $1,560,000
b. Compare Expected Values at nodes 4 and 7.
EV (node 4) = 1870 Includes $150 cost for research EV (node 7) = 2000
Difference is 2000 - 1870 = $130
Market research cost would have to be lowered $130,000 to $20,000 or less to make undertaking the research desirable.
c.
EV ( Node ) In Millions
4 $1,870
7 2,000
Difference $130
The cost of the market research study would have to decrease by at least $130,000 before Dante can change its decision.
d.
Payoff Probability
($2,000,000.00) 0.20
8,000,000 (0.80)(0.40)=.32
2,800,000 (0.80)(0.60)=.48
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