QUANTITATIVE ANALYSIS FOR MANAGEMENT DECISIONS - ONE OF THE COMMONE QUESTION

QUESTIONS:

Assume that Mr. X has already evaluated the potential profits associated with the various outcomes.  With a favorable market, 'X' thinks a large facility would result in a net of N200,000 to the firm. If the market is unfavorable, it would result to a net loss of N180,000. A small plant would result in a net profit of N100,000 in a favorable market, but a net loss of N20,000 would occur if the market was unfavorable. Finally, do nothing would result in a zero profit in either market. What alternative decision should Mr. 'X' adopt if each state of nature has a 0.50 chance?

SOLUTION:

The easiest way to present these values is by constructing a decision table called a payoff table.

The decision table of Mr. 'X' conditional values is shown below:

Decision making under Risk

ALTERNATIVES	FAVOURABLE MARKET	UNFAVOURABLE MARKET
Construct large plant	N200,000	-N180,000
Construct small plant	N100,000	-N20,000
Do-nothing	0	0
Probabilities	0.50	0.50

EMV (large Plant) = (0.50) (200,000) + (0.50) (-180,000)

=N100,000 - 90,000

=N10,000

EMV (Small Plant) = (0.50) (100,000) + (0.50) (-20,000)

= N50,000

=N40,000

EMV (Do-nothing) = (0.50) (0) + (0.50) (0)

= 0

The largest expected value results from the second alternative, that is, build a small facility. Thus, Mr. 'X' should proceed with the project and build a small facility..

Little explanation:

0.50 x 200,000 = 100,000 that is how we got that N100,000 above in the first workings 

0.50 x -180,000 = -90,000 that is how we finally got N100,000 - 90,000=10,000.

With that I hope you can work for how I got 40,000?

The time for your exams is short and this what I could lay my hands on. I wish you best of luck and I assure you that the blog is developing a programming language that will enable it stock loads of materials just like an e-Libraries in case of situations like this.