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Part b

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Jessica Allison
Jessica Allison

The document presents several financial plans and decision making approaches to determine the best course of action for a company given uncertain future conditions. Plan 1 uses Maximax, Maximin, Minimax Regret, Hurwicz, Expected Opportunity Loss, Expected Value, and Expected Value of Perfect Information approaches to analyze options to expand, maintain status quo, or sell the business. Plan 2 uses probability distributions and random numbers to simulate stock price changes and calculate average prices under different scenarios.

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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