Question

In Exercise 19.4, if the probability that his return will be audited is 0.1, which alternative will the consultant choose if he maximizes expected monetary value? What is the most he should be willing to pay for more information regarding his likelihood of being audited?
In exercise
A management consultant, unable to locate receipts or records for several business trips during the past year, makes some rough estimates of these expenditures and considers claiming them as business expenses on his income tax form. If he makes the claims and is not audited, he will owe $12,000 in taxes. If he makes the claims and the IRS audits his return, he will have to pay an extra $8,000 in taxes and penalties. If he ignores the trips, he will owe $14,000 in taxes. Construct a payoff table and a decision tree diagram for this decision situation.


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  • CreatedSeptember 08, 2015
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