A Firm Is Considering the Decision of Investing in New $\quad$

question 28

Multiple Choice

A firm is considering the decision of investing in new plants.The following is the profit payoff matrix under three conditions: it does not expand,it builds two new plants,or it builds one new plant.Three possible states of nature can exist--no change in the economy,the economy contracts and the economy grows.The firm has no idea of the probability of each state. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { The econdmy }$
$\begin{array}{c}\begin{array}{lll}\\\\\text { no new plants}\\\text { 1 new plant}\\\text { 2 new plants}\end{array}\begin{array}{c}\text { expands } \\\hline \$ 20 \text { million } \\\$ 30 \text { million } \\\$ 40 \text { million }\end{array}\begin{array}{l}\text { contracts } \\\hline-\$ 3 \text { million } \\-\$ 6 \text { million } \\-\$ 12 \text { million }\end{array}\begin{array}{c}\text { unchanged}\\\hline \text { \$ 4 million}\\\text { \$ 6 million}\\\text { \$ 8 million}\end{array}\end{array}$
What decision would be made using the maximax rule?

• A)no new plants
• B)one new plant
• C)two new plants
• D)not enough information to tell

Explain the influence of information overload on decision-making.

Understand the heuristic approach to reasoning and its implications.

Discuss the role of framing in preference and decision-making.

Compare and contrast different reasoning heuristics and their effects on judgment.

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Definitions:

Percentage-Of-Completion Method

An accounting method that recognizes revenues and expenses of long-term contracts as a percentage of work completed during the period.

Anticipated Tax Credits

Tax credits that are expected to be received in the future, affecting current financial decisions and accounting.

Income Tax Expense

The amount of money that a company or individual owes to the government based on earnings, which is recorded as an expense in financial statements.

Pretax Income

The earnings of a company before income taxes have been deducted, representing the financial performance from normal operations.