Dollar Department Stores has received an offer from Harris Diamonds to purchase Dollar's store on Market Street for $120,000. Dollar has determined probability estimates of the store's future profitability, based on economic outcomes, as: P($80,000) = 0.2, P($100,000) = 0.3, P($120,000) = 0.1, and P($140,000) = 0.4.

part a :

Not considering probabilities, based on each of the following criteria, should Dollar sell the store?

1 a. Optimistic approach (Maximax)

1 b. Conservative approach (Maximin)

Part B:

Now use the given probabilities and based on each of the following criteria, should Dollar sell the store?

B 1. Expected Monetary Value (EMV)

B 2. Expected Opportunity Loss (EOL)

Part C:

Determine the Expected Value of Perfect Information (EVPI).

Part D:

A marketing firm has offered to forecast the market with 100% accuracy at a cost of $10,000. Should the offer be accepted? Why or why not.

Please go into depth and show formulas and how you got to the solution.

A pharmacist has been monitoring sales of a certain over-the-counter pain reliever. Monthly sales during the last 15 months were:

1. Using 3-Month Weighted Moving Average using 0.2, 0.3, and 0.5 with the heaviest weights applied to the most recent months, develop forecasts for months from 11 to 16.
2. Using Exponential Smoothing using an α = 0.4 and the 10^th Month forecast of 50, develop forecasts for months from 11 to 16.  
3. Using Trend Projection, develop forecasts for months from 11 to 16.
4. Justify which method you would suggest using to predict future sales.

Question 4

A pharmacist has been monitoring sales of a certain over-the-counter pain reliever. Monthly sales during the last 15 months were:

1. Using 3-Month Weighted Moving Average using 0.2, 0.3, and 0.5 with the heaviest weights applied to the most recent months, develop forecasts for months from 11 to 16.       
2. Using Exponential Smoothing using an α = 0.4 and the 10^th Month forecast of 50, develop forecasts for months from 11 to 16.              
3. Using Trend Projection, develop forecasts for months from 11 to 16.
4. Justify which method you would suggest using to predict future sales.

Five years ago, a company was considering the purchase of 72 new diesel trucks that were 14.56% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 72 new trucks will cost the firm $5 million. Depreciation will be 24.84% in year 1, 38.39% in year 2, and 36.46% in year 3. The firm is in a 40% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Further Information (solution steps):

• Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section.

• Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption.

• Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge).

• Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section

• Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption.

• Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

Five years ago, a company was considering the purchase of 72 new diesel trucks that were 14.56% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks). Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 72 new trucks will cost the firm $5 million. Depreciation will be 24.84% in year 1, 38.39% in year 2, and 36.46% in year 3. The firm is in a 40% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts: Forecast for assumption #1 (low fuel prices): Price of Diesel Fuel per Gallon Prob. (same for each year) Year 1 Year 2 Year 3 0.1 $0.81 $0.89 $1.01 0.2 $1.02 $1.11 $1.11 0.3 $1.11 $1.23 $1.32 0.2 $1.3 $1.48 $1.46 0.2 $1.4 $1.58 $1.61 Forecast for assumption #2 (high fuel prices): Price of Diesel Fuel per Gallon Prob. (same for each year) Year 1 Year 2 Year 3 0.1 $1.22 $1.52 $1.69 0.3 $1.3 $1.7 $2.01 0.4 $1.81 $2.32 $2.52 0.2 $2.21 $2.53 $2.83 Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV. Answer % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%). Note: The educational purpose of this problem targets the students’ ability to read + follow instructions. Further Information (solution steps): Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section. Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption. Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge). Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption. Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

Five years ago, a company was considering the purchase of 65 new diesel trucks that were 14.78% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 65 new trucks will cost the firm $5 million. Depreciation will be 25.05% in year 1, 38.25% in year 2, and 36.02% in year 3. The firm is in a 40% income tax bracket and uses a 11% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The educational purpose of this problem targets the students’ ability to read + follow instructions.

Further Information (solution steps):

• Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section.

• Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption.

• Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge).

• Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section

• Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption.

• Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

Five years ago, a company was considering the purchase of 74 new diesel trucks that were 15.13% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 74 new trucks will cost the firm $5 million. Depreciation will be 25.35% in year 1, 38.81% in year 2, and 36.55% in year 3. The firm is in a 39% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The educational purpose of this problem targets the students’ ability to read + follow instructions.

Further Information (solution steps):

• Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section.

• Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption.

• Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge).

• Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section

• Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption.

• Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

Five years ago, a company was considering the purchase of 77 new diesel trucks that were 15.45% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 77 new trucks will cost the firm $5 million. Depreciation will be 25.2% in year 1, 38.48% in year 2, and 36.34% in year 3. The firm is in a 40% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Price of Diesel Fuel per Gallon

Prob. (same for each year)

Year 1

Year 2

Year 3

0.1

$0.79

$0.92

$1.01

0.2

$0.99

$1.13

$1.12

0.3

$1.12

$1.2

$1.3

0.2

$1.31

$1.44

$1.44

0.2

$1.4

$1.57

$1.6

Forecast for assumption #2 (high fuel prices):

Price of Diesel Fuel per Gallon

Prob. (same for each year)

Year 1

Year 2

Year 3

0.1

$1.22

$1.51

$1.7

0.3

$1.3

$1.71

$2.02

0.4

$1.82

$2.33

$2.49

0.2

$2.21

$2.5

$2.79

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer
% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The educational purpose of this problem targets the students’ ability to read + follow instructions.

Further Information (solution steps):

Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section.

Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption.

Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge).

Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section

Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption.

Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

#3

Direct Labor Cost Budget

Ace Racket Company manufactures two types of tennis rackets, the Junior and Pro Striker models. The production budget for July for the two rackets is as follows:

Both rackets are produced in two departments, Forming and Assembly. The direct labor hours required for each racket are estimated as follows:

The direct labor rate for each department is as follows:

Prepare the direct labor cost budget for July.

Problem 1: Teenager Mike wants to borrow the car. He can ask either parent for permission to take the car. If he asks his mom, there is a 20% chance she will say ”yes,” a 30% chance she will say ”no,” and a 50% chance she will say, ”ask your father.” Similarly, that chances of hearing ”yes”/”no”/”ask your mother” from his dad are 0.1, 0.2, and 0.7 respectively. Imagine Mike’s efforts can be modeled as a Markov chain with state (1) talk to Mom, (2) talk to Dad, (3) get the car (”yes”), (4) strike out (”no”). Assume that once either parent has said ”yes” or ”no,” Mike’s begging is done.

1. Construct the one-step transition matrix for this Markov chain.

2. Identify the absorbing state(s) of the chain.

3. Determine the mean times to absorption.

4. Determine the probability that Mike will eventually get the car if (1) he asks Mon fist and (2) he asks Dad first. Whom should he ask first?