Use Excel or Excel QM to do this group project. Please refer to the Excel Instructions Part I and II posted on the course website. Topic: Decision Analysis Question I: (13 mathit) Cal Bender and Becky Addison have known cach other since high school. Two years ago they entered the saene university and today they are taking undergraduate couses in the business school. Both hope to graduate with degrees in finance. In an atsempt to make cxtra moncy and to use some of the knowledge gained from their busizess courses, Cal and Becky have decided to look into the possibility of starting a small company that would provide word processing services to studeats who necded term papers of o4her reports pecpared in a professienal manner. Using a systems approach. Cal and Becky have identificd three strategies. Strategy I is to invest in a fairly expensive microcompater system with a high-quality laser printer. In a favorable market, they should be able to obtain a net profit of $40,000 over the next 2 years. If the market is unfavorable, they can lose 530.000. Strategy 2 is to parchase a less expensive system. With a favorable market, they could get a return during the next 2 years of $32,000. With an unfavorable market. they would incur a loss of $16.000. Their final strategy, strategy 3 , is to do nothing. Cal and Becky have estimated that there is a 65% chance that the market is favotable. a) Draw a simple decision tree for this problem. What is the best altemative based on Expected Monctary Value (EMV) criterion? [2] b) Cal and Becky are also considering hiring a bustness analyst at a cost of 53.000 to get additional information en the future market. The additional information can be positive (t.e., a favorable manket is likely) or negative (i.e., an unfavorable market is likely). In the past, if the market was favorable, the analyst peedicted positive information 82% of the times. If the matket was unfavorable, the analyst predicted negative information 78% of the times. Calculate the following posterior probabulitics: PeFevorable | Pasitive fofarmation) P(Favorable | Negative Informationt) (Keep answers to four decimal ploces) c) Draw a coenplex decision tree and answer the following questions: [5] Showld Cal and Brechy hire the business anahst? Why? - If the answer is Yes and the andist gives positove informarion, then which decision ahernative shoufd Cal and Beckly choose? Why ? - If the answer is Yes and the analyst gerver nergufive information, then which decision ahernative should Cat and Becky choose? Why? - If the answer is No, theit which decision atremative showld Col and Bocit choore? d) Basest on the Expected Value of Sample Information, how much maght Cal and Becky be willing to pay for this additional information? Why? [2] e) Calculate the efficiency of this sample information and interptet its meanifg. [2] Use Excel or Excel QM to do this group project. Please refer to the Excel Instructions Part I and II posted on the course website. Topic: Decision Analysis Question I: (13 mathit) Cal Bender and Becky Addison have known cach other since high school. Two years ago they entered the saene university and today they are taking undergraduate couses in the business school. Both hope to graduate with degrees in finance. In an atsempt to make cxtra moncy and to use some of the knowledge gained from their busizess courses, Cal and Becky have decided to look into the possibility of starting a small company that would provide word processing services to studeats who necded term papers of o4her reports pecpared in a professienal manner. Using a systems approach. Cal and Becky have identificd three strategies. Strategy I is to invest in a fairly expensive microcompater system with a high-quality laser printer. In a favorable market, they should be able to obtain a net profit of $40,000 over the next 2 years. If the market is unfavorable, they can lose 530.000. Strategy 2 is to parchase a less expensive system. With a favorable market, they could get a return during the next 2 years of $32,000. With an unfavorable market. they would incur a loss of $16.000. Their final strategy, strategy 3 , is to do nothing. Cal and Becky have estimated that there is a 65% chance that the market is favotable. a) Draw a simple decision tree for this problem. What is the best altemative based on Expected Monctary Value (EMV) criterion? [2] b) Cal and Becky are also considering hiring a bustness analyst at a cost of 53.000 to get additional information en the future market. The additional information can be positive (t.e., a favorable manket is likely) or negative (i.e., an unfavorable market is likely). In the past, if the market was favorable, the analyst peedicted positive information 82% of the times. If the matket was unfavorable, the analyst predicted negative information 78% of the times. Calculate the following posterior probabulitics: PeFevorable | Pasitive fofarmation) P(Favorable | Negative Informationt) (Keep answers to four decimal ploces) c) Draw a coenplex decision tree and answer the following questions: [5] Showld Cal and Brechy hire the business anahst? Why? - If the answer is Yes and the andist gives positove informarion, then which decision ahernative shoufd Cal and Beckly choose? Why ? - If the answer is Yes and the analyst gerver nergufive information, then which decision ahernative should Cat and Becky choose? Why? - If the answer is No, theit which decision atremative showld Col and Bocit choore? d) Basest on the Expected Value of Sample Information, how much maght Cal and Becky be willing to pay for this additional information? Why? [2] e) Calculate the efficiency of this sample information and interptet its meanifg. [2]
