QUESTION $4$

$(15$ marks$)$

This question consists of two unrelated parts: PART A and PART B$.$

PART A

$(9$ marks$)$

Drive$-$With$-$Us $($Pty$)$ Ltd $("$DWU$")$ is a rental company that has three mutually exclusive rental projects to undertake. Management believes that the success of the projects will depend on consumers reaction. There is a $20\%$ chance that consumer reaction will be strong, $45\%$ chance that consumer reaction will be good and $35\%$ chance that consumer reaction will be weak. DWU uses expected values to make this type of decision,

The estimated net present value for each possible outcome is as follows:

$\backslash$table$[[$Consumer demand,Projects$],[$Class A$,$Class B$,$Class C$],[$Strong$,$Rands,Rands,Rands$],[2000000,2600000,2200000],[450000,500000,575000],[,400000,340000,300000]]$

A market research company called Solutions $($Pty$)$ Ltd believes that it can provide perfect information on whether the consumer reaction will be strong, good or weak.

REQUIRED:

Calculate the maximum amount that Drive$-$With$-$Us $($Pty$)$ Ltd should be willing to pay to Solutions $($Pty$)$ Ltd for the market research information.

Round your answers to two decimal places where required.

$(9$ marks$)$

$109$

HMAC$330-1-$Jan$-$Jun$2024-$FA$2-$V$3-$NM$-17082023$

ANNEXURE I: FORMATIVE ASSESSMENT $2$

PART B

$(6$ marks$)$

Quality $($Pty$)$ Ltd$,("$Quality$")$ uses a third$-$party for the packaging of Quality's products. The current average cost per packaging is R$124.$ Quality is trying to decide whether to establish an in$-$house packaging service. A number of factors could affect the average total cost per packaging for the in$-$house service. The table below shows the possible average total costs and the probability of each one occurring.

$\backslash$table$[[$Average total cost in Rands,Probability $\%],[107,14],[112,12],[122,13],[124,10],[128,16],[135,20],[148,15]]$

The expected value of the average total cost, based on the probability above is $R126\mathrm{.}36.$

$\frac{14}{15}$

REQUIRED:

Explain the decision that the management of Quality $($Pty$)$ Ltd is likely to make, based on the probability distribution and the current packaging cost of R$124$ per packaging, if the management is:

$($a$)$ Risk neutral

$($b$)$ Risk averse

$($c$)$ Risk seeker

Round your answers to two decimal places where required.