In the Following Profit Table, D_i Represents Decision Variables and S_i

question 41

Short Answer

In the following profit table, d_i represents decision variables and S_i represents states of nature.
$$\begin{array} { c | c c c c } & \mathbf { S } _ { 1 } & \mathbf { S } _ { \mathbf { 2 } } & \mathbf { S } _ { \mathbf { 3 } } & \mathbf { S } _ { \mathbf { 4 } } \\\hline d _ { 1 } & 15.00 & 15.00 & 15.00 & 15.00 \\d _ { 2 } & - 10.00 & - 5.00 & 25.00 & 25.00 \\d _ { 3 } & - 35.00 & 0 & 40.00 & 60.00 \\d _ { 4 } & - 60.00 & - 20.00 & 50.00 & 90.00\end{array}$$
a. If management assigns probabilities as follows: S₁ = 0.15; S₂ = 0.25; S₃ = 0.40; and S₄ = 0.20, determine the expected value for d₂.
b. Determine the expected value for d₃.
c. Assuming the largest expected value for a decision variable is 24.00, determine the value of perfect information.

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Definitions:

Real Options

The value of additional decision-making opportunities available to a business when investing, likened to financial options.

Cash Flow

The amount of cash and cash equivalents being transferred into and out of a business, indicating its liquidity position.

Net Present Value

Net present value (NPV) is the calculation used to find today’s value of a future stream of payments and earnings, accounting for the time value of money.

Cost of Capital

The return rate that a company must achieve in order to compensate its investors for the risk of the investment, including the cost of equity and debt.