Decision Analysis Case Study Ch 3

Problem Statement

Jim Kelly, a corporate raider, has acquired a textile company and is contemplating the future of one of its major plants, located in Downtown Silver Spring, Maryland. Three alternatives decisions are being considered: (1) expand the plant and produce and produce lightweight, durable materials for possible sales to the military, a market with little foreign competition; (2) maintainthe status quo at the plant, continuing production of textile goods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first two alternatives is chosen, the plant will still be sold at the end of a year. The amount of profit that could be earned by selling the plant in a year depends on foreign market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this decision.

State of Nature

Decision

Good Foreign

Competitive Conditions

Poor Foreign

Competitive Condition

Expand

$900,000

$600,000

Maintain status quo

1,400,000

-150,000

Sell now

420,000

420,000

a.Determine the best decision by using the following criteria:

1.Maximax

2.Maximin

3.Minimax regret

4.Huwicz ( = 0.3)

5.Equal likelihood

b.Assume that it is now possible to estimate a probability of 0.70 that good foreign competitive conditions will exist and a probability of 0.30 that poor conditions will exist. Determine the best decision by using expected value and expected opportunity loss.

c.Compute the expected value of perfect information

d.Develop a decision tree, with expected values at the probability nodes.