Question

PRACTICE 3 DMUR

Hudson Realty is considering a boost in advertising in order to reduce a large inventory of unsold houses.   The management plans to make its media decision using the following data on the expected success of newspaper versus pamphlet promotions.  Each promotion strategy requires the sane amount of capital:

ALTERNATIVES:                 a₁:Newspaper                         a₂: Pamphlet

EVENTS:                                e₁              e₂              e₃                                e₁              e₂              e₃

NET PROFITS:                      3000       7000   11000               5000   7000     9000

PROBABILITIE:                    .25   .50    .25                      .25    .50   .25

1.  Construct a decision tree and show which promotion alternative you would chose by using the expected value method ( )?

2.  Calculate the coefficient of variation (CoV) of each alternative, and determine which one should be chosen accordingly?

3.  Use the Z-table,and show the likelihood that Alternative1 as well as Alternative 2 will yield a net profit between $7000 and $9000.

ßAlternatives/Events Þ	e1	e2	e3
a1:     Newspaper	$ 3,000	$ 7,000	$ 11,000
a2:          Pamphlet	$ 5,000	$ 7,000	$ 9,000
fi : probabilities	.25	.5	.25

PRACTICE 4DMUR

You are considering two investment projects each having the same cost.  Each project is facing the following events, probabilities and net profits:

ALTERNATIVES:                 a₁:Newspaper                         a₂: Pamphlet

EVENTS:                                e₁              e₂              e₃                                e₁              e₂              e₃

NET PROFITS:                      4000     6000       9000    3000    7000   8000

PROBABILITIE:                    .25    .50   .25                    .30          .50          .20

1.  Construct a decision tree and show which project you would chose by using the expected value method ( )?

2.  Calculate the coefficient of variation (cov) of each project, and determine which one should you chose accordingly?

3.  Use the Z-table,and show the likelihood that Project and Project 2 will yield a net profit between $7000 and $9000.

ßAlternatives/Events Þ	e1	e2	e3
a1:     Newspaper	$ 4,000	$ 6,000	$ 9,000
a1: fi : probabilities	.25	.5	.25
a2:          Pamphlet	$ 3,000	$ 7,000	$ 8,000
a2: fi : probabilities	.3	.5	.2

Answer 1

IF YOU HAVE ANY DOUBTS COMMENT BELOW I WILL BE TTHERE TO HELP YOU..ALL THE BEST..

1)Expected value for alternative a1

=3000*0.25+7000*0.5+11000*0.25

=7000

Expected value for alternative a2

=5000*0.25+7000*0.5+9000*0.25

=7000

Both alternative have same expected value.

2)first calculate standard deviation for both alternatives

For a1,

=2828.43

For a2,

=1414.21

COV1=2828.43/7000=0.4041

COV2=1414.21/7000=0.2020

COV2<COV1,so alternative2 is better.

3)alternative 1

P(7000<x<9000)

z =0 when x=7000

z=(9000-7000)/2828.43=0.707

P(0<=z<=0.707)=P(z<=0.707)-P(z<=0)=0.7602-0.5=0.2602

For alternative 2

z=(9000-7000)/1414.21=1.414

P(0<=z<=1.414)=P(z<=1.414)-P(z<=0)=0.9213-0.5=0.4213

I HOPE YOU UNDERSTAND..

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THANK YOU...!!