A Family Business Is Considering Making an Investment in Its

question 1

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: If the expected value criterion is used then the best decision would be to

• A) make the large investment.
• B) make the medium investment.
• C) make the small investment.
• D) choose the stable demand.

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Definitions:

Interest Rates

The cost of borrowing money or the return on investment for savings, typically expressed as a percentage of the total amount loaned or invested.

Standard Deviations

A statistical measure of the dispersion or variability in a data set, commonly used to quantify the risk associated with a particular investment.

Probability Distribution

A mathematical function that provides the probabilities of occurrence of different possible outcomes for an experiment.

Correlation Coefficient

A statistical measure that calculates the strength and direction of the relationship between two variables, ranging from -1 to 1.