The electronic company Little has filed a legal complaint against Artex Computers, for unfair and monopolistic commercial
Question:
The electronic company Little has filed a legal complaint against Artex Computers, for unfair and monopolistic commercial practices; Little asks for $ 10 million in damages. On November 4, the company receives an offer from Artex to settle the dispute through a payment of $ 3.5 million for little. Little's management wants to decide whether to accept the settlement or continue with the complaint. Lawyers agree that the probability of Little winning is 2/3. However, they point out that even if they win, there is only a 50% chance that the judge will award the $ 10 million; there is the same probability that it will award a partial award of $ 5 million. Lawyers have also estimated that it will cost about $ 200,000 in legal fees between November and June (when the case is due to be heard), plus another $ 100,000 in fees to hear the case (about three months). When Artex offered the $ 3.5 million settlement, it stressed that it would be considered a "final offer" and would only be in effect for 30 days. However, Little's management and attorneys agree that Artex may make a new offer in June, before the trial begins. After careful thought, deciding that a good probability of the probability of Artex's new offer in June is 0.60 and, if there is a new offer, the probability of the sea settlement times 4.
where X is the cash flow (in millions of dollars) obtained from the legal action. Develop the decision tree for Littie's decision problem. Put profit values in place of cash flows at the bottom of the tree. Analyze the tree with the utility values to determine the decision Littie should make.
Intermediate Accounting
ISBN: 978-1118147290
15th edition
Authors: Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield