Refer to Review given Problem. Power Tech is still considering the partnership with the Chinese manufacturing company. The analysis in Review Problem 12.1 has shown that the partnership is recommended (by a marginal difference in the expected revenue increase between the two options). Power Tech now wants to further examine the possible shipping delay and quality control problems associated with the partnership. Power Tech estimates that shipping may be delayed 40% of the time due to the distance. Independently of the shipping problem, there may be a quality problem 25% of the time due to communication difficulties and lack of close supervision bv Power Tech.
The payoff information is estimated as shown below. Develop a decision tree for Power Tech's shipping and quality control problems and analyze it. On the basis of EV, what is the recommendation regarding the possible partnership?
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Shipping Problem
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Quality Problem
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Gain in Annual Profit
|
|
No shipping delay
|
Acceptable Quality
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$20,000
|
|
No shipping delay
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Poor Quality
|
25,000
|
|
Shipping delay
|
Acceptable Quality
|
100,000
|
|
Shipping delay
|
Poor Quality
|
-100,000
|
Problem :
An investment has possible rates of return of 7%, 10%, and 15% over five years. The probabilities of attaining these rates, estimated on the basis of the current economy, are 0.65, 0.25, and 0.1, respectively. If you have ¥10 000 to invest,
(a) What is the expected rate of return from this investment?
(b) What is the variance of the rate of return on this investment?