Lean Manufacturing class Book: Manufacturing Systems Modeling and Analysis PLEAS

Question

Lean Manufacturing class

Book: Manufacturing Systems Modeling and Analysis

PLEASE TRY TO DO IT STEP BY STEP so I can understand the procedure.

1.8. There are three investment plans for your consideration. Each plan calls for an investment of $25,000 and the return will be one year later. Plan A will return $27,500. Plan B will return $27,000 or $28,000 with probabilities 0.4 and 0.6, re- spectively. Plan C will return $24,000, $27,000, or $33,000 with probabilities 0.2, 0.5, and 0.3, respectively. If your objective is to maximize the expected return, which plan should you choose? Are there considerations that might be relevant other than simply the expected values?

Explanation / Answer

This is a fairly simple problem . We need to calculate the expected return from each plan.

plan A

This is straight forward. the return is $27500 on investment of $25000. Profit =$2500

plan B

40% probabilty of $27,000 return and 60% probability of $28000 return.

Another way of looking at it is that 40% of my investment gives me $27000 and 60% gives me $28000.

Thus the aggregate return on 100 % inverment will be

=27000*0.40+28000*0.60 =$27600

This is a better option than plan 1 by $100 .

plan C

Again we will look at 100 % return in which 20% comes from $24000,50% comes from $27000 and 30% comes from $33000.

Thus,

Overall return =0.20*24000+0.50*27000+0.30*33000 =$28200

Clearly option C (i.e plan C) will give me the best return out of all 3 plans.

i will hence choose plan C.

Mathematically ,the inofrmation about expected value and probabilities is sufifceient to take the call.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.