Hrm 531 Week 4 Paper

In this paper, we will be looking at three different scenarios in order to understand and implement different decision models.
Question one The Gorman manufacturing company is trying to decide whether to manufacture a component part or to purchase it. In order to make this decision we need to calculate the Expected Monetary Value for each probability. The highest EMV will be the best decision (Satyaprasad, Nirmala, & Saha, 2012). So, EMV for manufacture is= -20(.35) + 40(.35) + 100(.30) = -7+ 14+ 30 = 37. EMV for purchase is= 10(.35) + 45(.35) + 70(0.30) = 3.5 + 15.75 + 21 = 40.25. So, the expected monetary value for purchase option is higher that the manufacture option. So, purchasing the component part will be the best decision. To calculate the legitimacy of the decision we
need to calculate the Expected value of perfect information (EVPI). The EVPI is calculated by deducting the Expected value without perfect information from the expected value with perfect information (Satyaprasad, Nirmala, & Saha, 2012). The expected value without perfect information is the maximum EMV, which is 40.25. The expected value with perfect information = highest value from each state of nature x the probability. So, the Expected value with perfect information is = 10(.35) + 45(.35) + 100(.30) = 3.5 + 15.75 + 30 = 49.25. So, the EVPI = 49.75 – 40.25 = 9. As we can see, there is a censurably high difference between the expect value without perfect information and the expected value with perfect information. So, Gorman needs to obtain a better estimate of the demands. The company conducted a market study that shows the potential demand for the products is expected to report either favorable or unfavorable. Probabilities for favorable conditions are 0.1, 0.4 and 0.6. Prior probabilities are 0.35, 0.35, 0.30. So, the probability that the report will be favorable is = (0.1 x 0.35) + (0.4 x 0.35) + (0.6 x 0.30) = 0.355. Expected value of market research information for each decision is:
If unfavorable, EV(s1) = 0.49 x (-20) + 0.33 x40 + 0.19 x 100 = 22.4
EV(s2) = 0.49 x 10 + 0.33 x 45 + 0.19 x 70 = 33.05.
If favorable,
EV(d1) = 0.10 x (-20) + 0.39 x 40 + 0.51 x 100 = 46.7
EV (d2) = 0.10 x 10 + 0.33 x 45 + 0.19 x 70 = 29.15 Gorman’s optimal strategy with the test market study was to gain a proper knowledge about the demand of the product in the market place. This allows the company to choose more easily between the manufacture and purchase option. If the demand of the product is favorable then the company can manufacture the product on their own, as it will increase profit in the future. But if the demand is unfavorable, then the company can opt for purchasing the product and get as much profit as possible from it within a short time.
Question two Peter has the choice of making a business deal that can give him either $100 reward or $0 reward. The probability for both the scenarios is 0.5. He already has $1000 as fixed asset. So, in this case if he keeps the deal, then he will have either $1100 or $1000. If he sells the deal for x dollars and then he will have $1000+x. So, the calculation for x will be: ln(1000 +x) = 0.5ln(1100) + 0.5ln(1000).
So, ln(1000 +x) = 695541. (1000 +x) = e6.95541. x=e6.95541 −1000 x= $48.81. So, the smallest amount for which he can sell it is $48.81. If peter decides to buy the deal for x dollars he will either have $1100-x or $1000-x , as probability in both case are equal. ln(1000) = 0.5ln(1100 −x) + 0.5ln(1000 −x)
2ln(1000) = ln(1100 −x) + ln(1000 −x)
13815511 = ln(1100−x)(1000 −x) e13.815511 = (1100 −x)(1000 −x) e13.815511 = 1100000 − 2100x+2x
2x − 2100x+ (1100000−e13.815511) = 0
Using the formula for finding roots of quadratic equations, (Satyaprasad, Nirmala, & Saha, 2012), x= {2100 ± √4410000- 4(1100000-e13.815511 )}/2 x= $48.75 or x= $2051.25
The second result ($2051.25) is unlikely. So, the most amount that peter should pay in order to purchase the deal is $48.75.
Question three To clearly describe the decision problem of Mountain view development corporation, we have to conduct a decision tree.
Payoff one = Total income – construction cost – property cost.
= $15,000,000 - $8,000,000 - $ 5,000,000 = $2,000,000
Payoff two = Expense of forfeiting the bid = ($5,000,000 x 10) / 100 = $5,00,000.
Payoff three = 0
Payoff Four = 0
Payoff Five = 0 If the market research information is not available, mountain view corporation should not submit a $5,000,000 bid, because if the corporation decides to submit the bid without any market information then they go into a $100,000 loss. So, it is in the company’s best interest not to submit a bid without any research information regarding the market. On the other hand, if market research information is available to the corporation, and if the voters approve the zoning change, then mountain view has to submit a $5,000,000 bid and expect an EMV of $245,000. But, if the voters don not approve of the zoning change, then the company should not submit the bid, because if they submit the bid and obtain the property but fail to complete the purchase, then it will face a loss of $145,000. Mountain view corporation should only the market research firm, if market research value is greater than the cost of performing the market research
itself.