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Part b

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Part b

  1. 1. Part B: Financial PlanPlan 1 State of NatureDecision Competitive Foreign Conditions Poor Competitive ($) Conditions ($)Expand 800,000 500,000Maintain status quo 1,300,000 -150,000Sell now 320,000 320,000Maximax State of Nature Competitive Poor Competitive MaximaxDecision Foreign Conditions ConditionsExpand $800,000 $500,000 800,000Maintain status quo 1,300,000 -150,000 1,300,000Sell now 320,000 320,000 320000According to Maximax, the decision maker should make a decision on maintain status quo.Maximin State of Nature Competitive Foreign Poor Competitive MaximinDecision Conditions ConditionsExpand $800,000 $500,000 500000Maintain status 1,3000,00 -150,000 -150000quoSell now 320,000 320,000 320000
  2. 2. According to Maximin, the decision maker should make a decision on expand the market.
  3. 3. Minimax Regret Approach State of Nature Competitive Poor MinimaxDecision Foreign Competitive regret Conditions ConditionsExpand $800,000 500000 $500,000 0 500000Maintain status 1,3000,00 0 -150,000 650000 650000quoSell now 320,000 980000 320,000 180000 980000According to Minimax regret approach, the decision maker should make a decision to expandtheir market.Hurwicz @ Criterion of RealismAlternatives Competitive Poor Criterion of realism Foreign Competitive Conditions ConditionsD1 500000 0 (0.3)(500000)+(0.7)(0)=150000D2 0 650000 (0.3)(650000)+(0.7)(0)=195000D3 980000 180000 (0.3)(980000)+(0.7)(180000)=420000According to Hurwicz, the decision maker should make a decision of selling the business.Expected Opportunity Loss ApproachAlternatives CFC (0.7) PCC (0.3) EOLD1 500000 0 (500000)(0.7)+(0)(0.3)= 350000D2 0 650000 (0)(0.7)+(650000)(0.3)=195000D3 980000 180000 (980000)(0.7)+(180000)(0.3)=740000According to expected opportunity loss approach, the decision maker should make a decisionupon maintain status quo for the business.Expected Value Approach
  4. 4. Alternatives CFC(0.7) PCC(0.3) EVD1 $800,000 $500,000 (800000)(0.7)+(500000)(0.3)=710000D2 1,3000,00 -150,000 (1300000)(0.7)+(- 150000)(0.3)=865000D3 320,000 320,000 (320000)(0.7)+(320000)(0.3)=320000According to Expected Value approach, the decision maker should make a decision uponmaintain status quo for the company.Expected value of perfect InformationEVwPI= (1300000)(0.7)+(500000)(0.3)= 1060000 EVPI = EVwPI – EvwoPI EVPI = 1060000- 865000 = 195000
  5. 5. Plan 2Stock Price Change Probability Cumulative Interval of random($) 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 91-100Random 0.1091 0.9407 0.1941 0.8083numbersPrice Per share -1 +4 0 +3Average stimulated price per share= 6/3= 2Random 0.2540 0.7144 0.0563 0.0125numbersPrice Per share 0 +2 -1 -2Average stimulated price per share = -1/3 = -0.33

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