problem 13 a,b,c,d and e

Moject is SO) because is the consequence decision alternative ducted and DRI does not locate in Potsdam, the annual revenue will be so will have been incurred and no revenues will be forthcoming. a. What is the decision to be made, what is the chance event, and what is the b. Compute the expected annual revenue associated with the decision lengthen the runway. c. Compute the expected annual revenue associated with the decision alter lengthen the runway. d. Should the town elect to lengthen the runway? Explain. e. Suppose that the probabilities associated with lengthening the runway were as con alternative to ay were as follows DRI Plant 0.40 0.30 No DRI Plant 0.10 Air Express Center No Air Express Center 0.20 SEL What effect, if any, would this change in the probabilities have on the recommende decision? 13. Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine. and the Riesling grapes would be used to produce a semidry Riesling wine. It takes approxi. mately four years from the time of planting before new grapes can be harvested. This length Problems 661 ceming future demand and makes the decision Three posibilities are being considered: Chardon of time creates a great deal of uncertainty in future demand and about the type of grapes to plant difficult. Three posibilities are being con nay grapes only: Riesling en pes only and both Chardonnay and Riesling rapes Seneca management decided that for planning purposes it would be adequate to demandssibilities for each i w w erweal with two pe of wine, it was necessary to assess four probabilities with the help of some industry publications, management made the following probability assem it would be adequate to consider only two ng or weak with two possibilities for each With the help of some forecasts in Chardonnay Demand Weak Strong Riesling Demand Weak Strong 0,05 0.50 0.25 0.20 ution to profit of $20,000 if Seneca Hill only weak for Chardonnay wine, and $70,000 if Revenue projections show an annual contribution to profit of $20,00 plants Chardonnay grapes and demand is weak for Chardonnay wine, an Seneca only plants Chardonnay ra n dmand is strong for Chardonnay w Seneca only plants Riesling cranes, the annual profit projection is capes. If Seneca weak for Riesling grapes and S45.000 if demand is strong for Riesling grapes. Se plants both types of grapes, the annual profit projections are shown in the following table. Chardonnay Demand Weak Strong Riesling Demand Weak Strong $22.000 $40.000 $26.00 560.000 a. What is the decision to be made, what is the chance event, and what is the conse- quence? Identify the alternatives for the decisions and the possible outcomes for the chance events. b. Develop a decision tree. c. Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit. d. Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case, Suppose the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50. Other members of the management team expect the Chardonnay market to become saturated at some point in the future, causing a fall in prices. Suppose that the an- nual profit projections fall to $50,000 when demand for Chardonnay is strong and Chardonnay grapes only are planted. Using the original probability assessments. determine how this change would affect the optimal decision. The following profit payoff table was presented in Problem 1: 14. Decision Alternative State of Nature 82 100 100 250 100