Scenario A Company Must Decide Whether or Not to Change Its

question 21

Short Answer

Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
-Which decision has the minimum expected opportunity loss?

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Definitions:

No Gain

Refers to a situation in financial or business transactions where there is no profit or increase in value.

Gain on Disposal

is the financial profit made from the sale of an asset, which exceeds its carrying amount.

Insurance Cheque

A payment issued by an insurance company to cover losses or claims.

Carrying Amount

Carrying amount, also known as book value, is the value recorded on the balance sheet for a particular asset, reflecting its original cost minus any depreciation, amortization, or impairment costs.