Limousine Inc

question 25

Essay

Limousine Inc.must decide how many new limousines to buy.The owner has narrowed down the decision to two choices: buy one limousine or two limousines.If only one limousine is bought and demand ridership is high,a second limousine can be bought later.The probability of high demand is ridership 0.65,and the probability of low demand ridership is 0.35.The net present value obtained with the purchase of two limousines is $100,000 if demand is high and $65,000 if demand is low.The net present value for one limousine and low demand is $55,000.If demand is high,there are two options.The first option is to buy a second limousine.This option has a net present value of $80,000.The second option is to do nothing,which would have a net present value of $50,000.
a. Develop a decision tree for this problem.
b.Analyze the decision tree and determine how many limousines should be bought initially.

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Definitions:

Budget Deficit

The situation in which a government's expenditures exceed its revenue, resulting in the need to borrow money or increase taxes.

Loanable Funds

Describes the market where savers supply funds for loans to borrowers, influencing interest rates and investment.

Government Budget Deficit

A government budget deficit occurs when a government spends more money than it receives in revenue over a given period.

Foreign-Currency Exchange

The trading of currencies from different countries against each other.