A Family Business Is Considering Making an Investment in Its

question 60

Multiple Choice

A family business is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation: The expected value for the large investment decision is

• A) $700,000.
• B) $540,000.
• C) $330,000.
• D) $165,000.

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Definitions:

Bond Exchange

The process of trading bonds in the financial markets or swapping one bond for another to achieve better investment goals.

Carrying Cost

The total cost associated with holding inventory, including storage, insurance, taxes, depreciation, and opportunity costs, among others.

Setup Cost

The expenses incurred in preparing equipment or processes for manufacturing an order or batch of products.

Annual Demand

The total quantity of a product or service that consumers are willing and able to purchase over a year.