Assignment - Part A: Decision Analysis (25 marks)

Heywood Finance and Development Corporation (HFDC), a sister concern of Heywood Triangle Inc., is considering bidding on a contract for a new office building complex. The company must decide whether to bid on the contract. The cost of preparing the bid is 200,000. The company has a 0.8 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay 2,000,000 to become a partner in the project. The company will then consider doing a market research study to forecast demand for the office units prior to beginning construction. The cost of this study is 150,000. The possible outcomes of the market research study are High and Moderate with probabilities 0.6 and 0.4, respectively. In any case, whether the demand is High or Moderate or No market research is performed, the company can either still build the complex or sell its right in the project to another developer.

If the complex is built the actual demand of the complex can again be High or Moderate irrespective of whether the market research data were collected or if the market forecast was High or Moderate. The estimated probabilities that the actual demand is High are: 0.85, 0.225 and 0.6 if the forecast is High, Moderate and No market research, respectively.

The decision to build the complex will result in an income of 5,000,000 if demand is High and 3,000,000 if Demand is Moderate. If HFDC chooses to sell its rights in the project to another developer, income from the sale is estimated to be 3,500,000.

Managerial report: Perform a decision analysis of the problem facing Heywood Finance and Development Corporation (HFDC) and prepare a report that summarises your findings, recommendations and critical appraisal. Include the following information in your report-

a decision tree that shows the logical sequence of the decision problem and all detailed calculations involved in the tree,

a recommendation or the set of recommendations of a course of action(s) to Heywood Finance and Development Corporation (HFDC),

a profit/loss table showing the possible levels of profit the company can make and the associated probabilities and

a critical appraisal.