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Part B: Financial Plan


Plan 1


                                         State of Nature
Decision               Competitive Foreign Conditions Poor               Competitive
                       ($)                                  Conditions ($)
Expand                 800,000                              500,000
Maintain status quo    1,300,000                            -150,000
Sell now               320,000                              320,000



Maximax


                                   State of Nature
                       Competitive          Poor Competitive       Maximax
Decision               Foreign Conditions Conditions
Expand                 $800,000             $500,000               800,000
Maintain status quo    1,300,000            -150,000               1,300,000
Sell now               320,000              320,000                320000




According to Maximax, the decision maker should make a decision on maintain status quo.

Maximin

                    State of Nature
                    Competitive Foreign     Poor Competitive Maximin
Decision            Conditions              Conditions
Expand              $800,000                $500,000         500000
Maintain     status 1,3000,00               -150,000         -150000
quo
Sell now              320,000               320,000                320000
According to Maximin, the decision maker should make a decision on expand the market.
Minimax Regret Approach


                                   State of Nature
                Competitive                     Poor                           Minimax
Decision        Foreign                         Competitive                    regret
                Conditions                      Conditions
Expand          $800,000           500000       $500,000           0           500000
Maintain status 1,3000,00          0            -150,000           650000      650000
quo
Sell now        320,000            980000         320,000          180000      980000


According to Minimax regret approach, the decision maker should make a decision to expand
their market.

Hurwicz @ Criterion of Realism


Alternatives      Competitive        Poor              Criterion of realism
                  Foreign            Competitive
                  Conditions         Conditions
D1                500000             0                 (0.3)(500000)+(0.7)(0)=150000
D2                0                  650000            (0.3)(650000)+(0.7)(0)=195000
D3                980000             180000            (0.3)(980000)+(0.7)(180000)=420000



According to Hurwicz, the decision maker should make a decision of selling the business.

Expected Opportunity Loss Approach


Alternatives          CFC (0.7)       PCC (0.3)        EOL
D1                    500000          0                (500000)(0.7)+(0)(0.3)= 350000
D2                    0               650000           (0)(0.7)+(650000)(0.3)=195000
D3                    980000          180000           (980000)(0.7)+(180000)(0.3)=740000



According to expected opportunity loss approach, the decision maker should make a decision
upon maintain status quo for the business.

Expected Value Approach
Alternatives       CFC(0.7)            PCC(0.3)   EV
D1                 $800,000            $500,000   (800000)(0.7)+(500000)(0.3)=710000
D2                 1,3000,00           -150,000   (1300000)(0.7)+(-
                                                  150000)(0.3)=865000
D3                 320,000             320,000    (320000)(0.7)+(320000)(0.3)=320000



According to Expected Value approach, the decision maker should make a decision upon
maintain status quo for the company.

Expected value of perfect Information


EVwPI= (1300000)(0.7)+(500000)(0.3)= 1060000

  EVPI = EVwPI – EvwoPI

  EVPI = 1060000- 865000

        = 195000
Plan 2


Stock Price Change Probability                  Cumulative       Interval of random
($)                                             Probability      number
          -2                    0.05                    0.05              0-5
          -1                    0.10                    0.15              6-15
          0                     0.25                    0.40             16-40
          +1                    0.20                    0.60             41-60
          +2                    0.20                    0.80             61-80
          +3                    0.10                    0.90             81-90
          +4                    0.10                    1.00             91-100


Random             0.1091              0.9407           0.1941      0.8083
numbers
Price Per share    -1                  +4               0           +3



Average stimulated price per share= 6/3= 2

Random             0.2540              0.7144           0.0563      0.0125
numbers
Price Per share    0                   +2               -1          -2



Average stimulated price per share = -1/3 = -0.33

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Part b

  • 1. Part B: Financial Plan Plan 1 State of Nature Decision Competitive Foreign Conditions Poor Competitive ($) Conditions ($) Expand 800,000 500,000 Maintain status quo 1,300,000 -150,000 Sell now 320,000 320,000 Maximax State of Nature Competitive Poor Competitive Maximax Decision Foreign Conditions Conditions Expand $800,000 $500,000 800,000 Maintain status quo 1,300,000 -150,000 1,300,000 Sell now 320,000 320,000 320000 According to Maximax, the decision maker should make a decision on maintain status quo. Maximin State of Nature Competitive Foreign Poor Competitive Maximin Decision Conditions Conditions Expand $800,000 $500,000 500000 Maintain status 1,3000,00 -150,000 -150000 quo Sell now 320,000 320,000 320000
  • 2. According to Maximin, the decision maker should make a decision on expand the market.
  • 3. Minimax Regret Approach State of Nature Competitive Poor Minimax Decision Foreign Competitive regret Conditions Conditions Expand $800,000 500000 $500,000 0 500000 Maintain status 1,3000,00 0 -150,000 650000 650000 quo Sell now 320,000 980000 320,000 180000 980000 According to Minimax regret approach, the decision maker should make a decision to expand their market. Hurwicz @ Criterion of Realism Alternatives Competitive Poor Criterion of realism Foreign Competitive Conditions Conditions D1 500000 0 (0.3)(500000)+(0.7)(0)=150000 D2 0 650000 (0.3)(650000)+(0.7)(0)=195000 D3 980000 180000 (0.3)(980000)+(0.7)(180000)=420000 According to Hurwicz, the decision maker should make a decision of selling the business. Expected Opportunity Loss Approach Alternatives CFC (0.7) PCC (0.3) EOL D1 500000 0 (500000)(0.7)+(0)(0.3)= 350000 D2 0 650000 (0)(0.7)+(650000)(0.3)=195000 D3 980000 180000 (980000)(0.7)+(180000)(0.3)=740000 According to expected opportunity loss approach, the decision maker should make a decision upon maintain status quo for the business. Expected Value Approach
  • 4. Alternatives CFC(0.7) PCC(0.3) EV D1 $800,000 $500,000 (800000)(0.7)+(500000)(0.3)=710000 D2 1,3000,00 -150,000 (1300000)(0.7)+(- 150000)(0.3)=865000 D3 320,000 320,000 (320000)(0.7)+(320000)(0.3)=320000 According to Expected Value approach, the decision maker should make a decision upon maintain status quo for the company. Expected value of perfect Information EVwPI= (1300000)(0.7)+(500000)(0.3)= 1060000 EVPI = EVwPI – EvwoPI EVPI = 1060000- 865000 = 195000
  • 5. Plan 2 Stock Price Change Probability Cumulative Interval of random ($) Probability number -2 0.05 0.05 0-5 -1 0.10 0.15 6-15 0 0.25 0.40 16-40 +1 0.20 0.60 41-60 +2 0.20 0.80 61-80 +3 0.10 0.90 81-90 +4 0.10 1.00 91-100 Random 0.1091 0.9407 0.1941 0.8083 numbers Price Per share -1 +4 0 +3 Average stimulated price per share= 6/3= 2 Random 0.2540 0.7144 0.0563 0.0125 numbers Price Per share 0 +2 -1 -2 Average stimulated price per share = -1/3 = -0.33