Your firm is considering investment projects, A, B, and C. Given the budget constraints, you must...

Your firm is considering investment projects, A, B, and C. Given the budget constraints, you must choose either A or B, but not both.

Project A will provide a net return of either $40, $50, or $60, respectively, depending on whether there will be a recession, normal conditions, or a boom. The figures for Project B are $20, $30, or $80, respectively.

Project C’s figures are: $30, $40, or $70, respectively. Forecasts indicate that, given the current trends in appropriate economic indicators in the following year the chances (fi) are 30% that a recession will occur, 50% that the economic conditions will stay as they are, and 20% that the economy will enjoy a boom.

1. Construct a payoff table. (10 points)

2. If there were an uncertain decision situation rather than one under risk, what would your choice be under the condition of perfect optimism (MXMX), perfect pessimism (MXMN), optimism at a = .8 (REAL’SM), Equal Likelihood, and Minimization of Regrets? (50 points)

3. What is the expected value ( ) of each alternative in DMUUR? Which alternative must you choose from this point of view? (10 points)

4. Which project should be chosen on the basis of the calculation of coefficient of variation? (20 points)

5. Calculate the probability of making at least $60 net return. Which investment is best? (10 points) Name: _______________ Summary of Answers:

BBA 405 Test 1 Score:______

1. ORIGINAL Table: a =_____ Event/Condition Recession Normal Conditions Boom Project A Project B Project C fi (probabilities)

2. Show all your work, then Summarize below: DMUU RESULTS - be sure to have a Recap - Table Summary - and Final Conclusion with supporting reason! DMUU: Answer Reason Perfect Optimism: MXMX Perfect Pessimism: MXMN Optimism at α =___: REAL’SM Equal Likelihood: Minimizing Regret: OVERALL Conclusion: __ 3. Show all your work and Summarize below: DMUR RESULTS - be sure to have a Recap - Table Summary - and Final Conclusion with supporting reason! Xbar Sigma CoV Normal Dist. % Project A Project B Project C OVERALL Conclusion:

Expert Solution

orchestra answered 1 year ago

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