"JR Davidson recently started a practice in Landscape Design and is considering the purchase of an automated drafting system. JR can purchase a system with three possible drafting capacities. The payoffs for having any of these systems depend on the demand for drafting services over the next few years. The costs for each system are shown as follows along with JR's assessment of the probabilities that demand will match the capacity of each one: Total CostProbabilitySmall system$10,0000.4Medium system$14,0000.3Large system$20,0000.3Working at capacity, each system would generate net cash flow at a yearly rate of 50 percent of its total cost. If a system is chosen that is smaller than demand, it would work at capacity. If a system is chosen that is larger than demand, revenue from the system would be limited by demand. For convenience, JR has initially decided to count cash flow for three years, without discounting. For example, if JR chooses the Medium system and demand is Small, then the profit is calculated as follows: Profit=30.510,000?14,000=$1,000

1. What is the best decision under the maximax criterion? 2. What is the best decision under the maximin criterion? 3. What is the best decision under the minimax regret criterion? 4. What is the best decision under the expected payoff criterion?1 Reviewing the analysis, JR decides that the assumption of a 3-year horizon is too restrictive. Instead, it makes more sense to treat the horizon as uncertain, with the following probability distribution:

Two years of cash flow has 0.4 probability. Three years of cash flow has 0.4 probability. Four years of cash flow has 0.2 probability.Now, what is the best decision under the expected payoff criterion?"

AutoSave O OFF C 60 ... BUS6050_Week Five_Exercise 13-3 Template (2) Home Insert Draw Page Layout Formulas Data Review View Tell me Comments LE Share Auto-sum & Cut AA Number Bad Aria v 10 P Wrap Text v Normal [G Copy Fill Conditional Format Good Neutral Insert Delete Format Sort & Find & Analyse Paste BIU VO Merge & Centre v $ ~ % 9 68 328 Formatting as Table Clear Filter Format Select Data Yes No Open recovered workbooks? Your recent changes were saved. Do you want to continue working where you left off? C24 + X V fx B C D E F G H K L M N P Q R S T U V W X Y Z AA Drafting System Base Case Parameters Maximax Criterion States Max M Payoff Choice Revenue 10 DO YOUAWN Small system Medium system 14 Large system 20 9 Maximin Criterion States Min Profit 10 S Payoff Choice 11 Small system 12 Medium system 13 Large system 14 Adjustment for part (e) 15 Regret Criterion 16 Regret Table States Years 17 M Probability 18 Small system Expected number of years 19 Medium system 20 Large system 21 Revenue 22 States Max 10 23 S M Regret Choice 14 24 Small system 20 25 Medium system 26 Large system Profit 27 28 Expected Payoff Criterion States 29 S M 30 Probability 0.4 0.3 0.3 31 EP Choice EP Choice 32 Small system 0.0 Small system 33 Medium system 0.0 Medium system 34 Large system 0.0 0.0 Large system 35 36 37 38 39 40 41 42 43 44 45 46 48 Sheet1 + " - 100% Ready 1Accessibility: Good to go