Lynn Miller has recently come into enough money to consider seriously the various types of investments that are available to her. After studying the various forms of investments, Lynn has decided that only three types suit her needs. These are money funds, stocks, and bonds. The choice of an investment depends on the prime rate since the return on the investment will be a function of this interest rate. Currently the prime rate is 125%, but is considered quite volatile and can go up or down significantly over the coming year. On the basis of the current return on investments, Lynn has developed the following tables showing the value of a $100,000 investment after one year depending on the prime rate at the end of the year. TABLE P12-15a. Return on $100,000 Investment Prime Rate at End of Year Option 8% 12% 15% Stocks Bonds Money market $125,000 140,000 108,000 S110,000 112,000 112,000 S 60,000 75,000 115,000 a. Lynn has polled various economics professors and has determined that 40% believe the prime rate will drop, 30% believe it will remain the same, and 30% believe it will go up. Use these values as subjective probabilities to make a prior analysis of the decision. b. What is the value of perfect information? c. Lynn has been told that the Niemi Forecasting Service claims to be able to forecast future interest rates. This service is available for a $5000 fee. Table P12-15b shows the past performance of the forecasting service. TABLE P12-15b. Performance of Forecasting Service Actual Change in Printe Predicted Change in Prime Rate Rise Samme Fall Rise Same Fall 60% 20% 20% 10% 60S 305% 20% 20% 60% Use the results from this table together with the prior probabilities to determine whether Lynn should use the forecasting service. uSE DECISION TREE APPROACH