The Alternatives 1 and 2 in the Following Payoff Table

question 81

Multiple Choice

The alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S₁) represent the levels of demand for the company products.S₁,S₂ and S₃ characterize high,medium and low demand with probabilities of .3,.6 and .1 respectively.The payoff values are in thousands of dollars. The management believes that the weather conditions significantly affect the level of demand.48 monthly sales reports are randomly selected.These monthly sales reports showed 15 months with high demand,28 months with medium demand,and 5 months with low demand.12 of the 15 months with high demand had favorable weather conditions.14 of the 28 months with medium demand had favorable weather conditions.Only 1 of the 5 months with low demand had favorable weather conditions.What is the maximum amount that the company would be willing to pay for perfect information?

• A)$95,000
• B)$112,000
• C)$7,000
• D)$24,000
• E)$17,000

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Definitions:

Present Value Factor

A multiplier used to determine the present value of a future sum of money or stream of cash flows given a specific discount rate.

Future Value Factor

A factor used in time value of money calculations that determines the future value of a present sum of money or a series of payments, accounting for compounding interest.

Reciprocals

The mathematical result of dividing 1 by a given number; a reciprocal of a fraction is its inverse.

Present Value

The current valuation of money to be received in the future or ongoing cash flows, based on a predetermined return rate.