Your firm is considering investment projects, A, B, and C. Given the budget constraints, you must...

 

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Your firm is considering investment projects, A, B, and C. Given the budget constraints, you must choose either A or B, but not both. Project A will provide a net return of either $40, $50, or $60, respectively, depending on whether there will be a recession, normal conditions, or a boom. The figures for Project B are $20, $30, or $80, respectively. Project C's figures are: $30, $40, or $70, respectively. Forecasts indicate that, given the current trends in appropriate economic indicators in the following year the chances (f) are 30% that a recession will occur, 50% that the economic conditions will stay as they are, and 20% that the economy will enjoy a boom. 1. Construct a payoff table. (10 points) 2. If there were an uncertain decision situation rather than one under risk, what would your choice be under the condition of perfect optimism (MXMX), perfect pessimism (MXMN), optimism at α = .6 (REAL'SM), Equal Likelihood, and Minimization of Regrets? (50 points) 3. What is the expected value (x) of each alternative in DMUUR? Which alternative must you choose from this point of view? (10 points) 4. Which project should be chosen on the basis of the calculation of coefficient of variation? (20 points) 5. Calculate the probability of making at least $55 net return. Which investment is best? (10 points) Your firm is considering investment projects, A, B, and C. Given the budget constraints, you must choose either A or B, but not both. Project A will provide a net return of either $40, $50, or $60, respectively, depending on whether there will be a recession, normal conditions, or a boom. The figures for Project B are $20, $30, or $80, respectively. Project C's figures are: $30, $40, or $70, respectively. Forecasts indicate that, given the current trends in appropriate economic indicators in the following year the chances (f) are 30% that a recession will occur, 50% that the economic conditions will stay as they are, and 20% that the economy will enjoy a boom. 1. Construct a payoff table. (10 points) 2. If there were an uncertain decision situation rather than one under risk, what would your choice be under the condition of perfect optimism (MXMX), perfect pessimism (MXMN), optimism at α = .6 (REAL'SM), Equal Likelihood, and Minimization of Regrets? (50 points) 3. What is the expected value (x) of each alternative in DMUUR? Which alternative must you choose from this point of view? (10 points) 4. Which project should be chosen on the basis of the calculation of coefficient of variation? (20 points) 5. Calculate the probability of making at least $55 net return. Which investment is best? (10 points)

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