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:

Small system//

Cost: $10,0000 Probability: 0.4

Medium system//

Cost:$14,0000 Probability 0.3

Large system//

Cost: $20,0000 Probability: 0.3

.Working 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?

5.Fill in the yellow sections on excel spreadsheet

Resources listed and in images

FIGURE 13.3 Three Chance Nodes in Telegraphic Form 1 competitor High 3 competitors competitors Fair competitor 2 competitors Medium3 competitors competitors Far 2 competitors Low 4 competitors Fair PoorX = ab v Conditional Formatting v Insert v 2 FIG Arial 10 A A E Number Format as Table nx Delete v Sort & Find & Analyze Sensitivity Paste B U v MVAv FE $ % 19 Cell Styles v Format Filter Select Data N34 X V fx B C D E F G H J K L M N O P Q R S T A 1 Drafting System Base Case Parameters Maximax Criterion States Max S M Payoff Choice Revenue Small system 10 CO CO VOUT A W N Medium system 14 o O 20 Large system Maximin Criterion States Min Profit 10 S M L Payoff Choice Small system Medium system Large system Adjustment for part (e) 5 Regret Criterion Regret Table States Years S M Probability Small system Expected number of years Medium system 20 Large system 21 Revenue 22 States Max 10 23 S M Regret Choice 14 24 20 Small system 25 Medium system 26 Large system Profit 28 Expected Payoff Criterion States 29 S M 30 Probability 0.4 .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 Sheet1