Consider the following decision matrix presenting net profit/loss estimates regarding an investment project:
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DEMAND
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LOW
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MEDIUM
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HIGH
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EQUIPMENT USED
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Small
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300
|
400
|
500
|
|
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Medium
|
100
|
600
|
600
|
|
|
Large
|
- 300
|
300
|
900
|
1. Considering that the probabilities applicable to demand are not known, show the decision recommendations from the points of view of perfect optimism; perfect pessimism; optimism at a = .8; conservatism (equal likelihood); and minimization regrets. Do you see a pattern? If so, which equipment would you choose? Explain.
2. Consider now that the probabilities for demand being low, medium and high have been calculated as .2, .35, and .45, respectively. By using a decision tree, find the expected value, the standard deviation, and the coefficient of variation foe each size of equipment. Which size of equipment would you recommend on the basis of the three coefficients of variation that you calculated?
3. Referring to the Z-Table, calculate the probability that each alternative (each different equipment) will turn out at least a $100 profit? What is the likelihood that each alternative will produce a profit of at least $ 300?