A Manager Is Quite Concerned About the Recent Deterioration of a Section

question 26

Essay

A manager is quite concerned about the recent deterioration of a section of the roof on a building that houses her firm's computer operations.According to her assistant there are three options which merit consideration: A, B, and C.Moreover, there are three possible future conditions that must be included in the analysis: I, which has a probability of occurrence of .5; II, which has a probability of .3; and III, which has a probability of .2.
If condition I materializes, A will cost $12,000, B will cost $20,000, and C will cost $16,000.If condition II materializes, the costs will be $15,000 for A, $18,000 for B, and $14,000 for C.If condition III materializes, the costs will be $10,000 for A, $15,000 for B, and $19,000 for C.
(A) Draw a decision tree for this problem.
(B) Using expected monetary value, which alternative should be chosen?

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Definitions:

Wheat Future

A standardized contract traded on futures exchanges to buy or sell a specific amount of wheat at a predetermined price on a specified future date.

Profit

Profit refers to the financial gain that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Corn Future

A standardized contract to buy or sell a specified amount of corn at a future date and price, traded on commodities exchanges.

Spot Price

The prevailing market rate where a specific asset, including commodities, currencies, or securities, can be purchased or sold for prompt distribution.