Problem 3.9 A textile company is considering three options for mana- ging its sales operation in the textile business: D1, local or national production facilities D2, international or foreign production facilities D3, combination of local and internationally production facilities The cost of the decision depends on future demand on its textile products. The annual costs for each decision alternative for three levels of demand (in thousands of dollars) are as follows: Future Demand State. High Medium Low Demand Demand Demand Decision Alternatives (S1) (S2) (83) D1, local or national production facilities 500 550 450 D2, international or foreign production 450 300 800 facilities D3, combination of local and international production facilities 350 400 650 The company estimated the probability of S3 to be three times the probability of 52, and the probability of S1 to be equal to the proba- bility of S2. a. Construct a decision tree for this decision situation showing the probability values and cost values in a graphical representation. b. What is the recommended strategy using the expected value approach? Problem 7.14 A financial services corporation is considering five alternative sites for moving its head office in the near future. Prelimi- nary assessments revealed varying expected and standard deviations of profit for each location as a result of variations in revenues gained from such a move and the associated costs incurred from renting these locations as follows: Expected Profit Standard Deviation of Profit Site Alternatives ($1000) Site A 150 Site B 350 Site C 450 Site D 600 Site E 750 ($1000) 50 150 130 115 230 Use the following utility (L) function in terms of profit (P) to repre- sent the risk attitude of the corporation: U(P) 0.25P-0.0001P to plot the efficient frontier and utility curves for this investment situation and to recommend the optimal alternative. (Hint: Plot the standard deviation on the vertical axis as shown in Figure 7.9.)