The Following Table Shows Cost Payoffs for Four Decision Variables

question 8

Essay

The following table shows cost payoffs for four decision variables and four states of nature. $\begin{array}{c|cccc}& \mathrm{S}_{1} & \mathrm{~S}_{2} & \mathrm{~S}_{3} & \mathrm{~S}_{4} \\\hline\mathrm{d}_{1} & 16 & 8 & 15 & 4 \\\mathrm{~d}_{2} & 12 & 12 & 10 & 6 \\\mathrm{~d}_{3} & 10 & 12 & 16 & 10 \\\mathrm{~d}_{4} & 9 & 14 & 20 & 12\end{array}$
a. Which decision variable would be selected using minimin criteria?
b. Which decision variable would be selected using minimax?
c. Which decision variable would be selected using minimax-regret criteria.
d. Suppose the decision maker assigns the probability for S₁ = 0.10; S₂ = 0.25; S₃ = 0.45; and S₄ = 0.20, which decision variable would be selected using the expected value criterion?

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Definitions:

Discounted Cash Flow

An appraisal technique that calculates the worth of an investment by forecasting its future cash inflows and adjusting for the time value of money.

Non-Discounted Cash Flow

Cash flows that are not adjusted for the time value of money, representing raw incoming or outgoing cash streams.

Mutually Exclusive

Situations or events that cannot occur at the same time, implying a choice between alternatives.

IRR Rule

A decision-making tool used in finance to evaluate investments, stating that a project is acceptable if its internal rate of return exceeds the required rate of return.