An operations manager's staff has compiled the information below for four manufacturing alternatives (A,B,C,and D)that vary by production technology and the capacity of the machinery.All choices enable the same level of total production and have the same lifetime.The four states of nature represent four levels of consumer acceptance of the firm's products.Values in the table are net present value of future profits in millions of dollars.
a.Assuming a maximax strategy,which alternative would be chosen?
b.If maximin were used,which would be chosen?
c.If the states of nature were equally likely,which alternative should be chosen?
Definitions:
Risk-Free Rate
The theoretical return on an investment with no risk of financial loss, typically represented by the yield on government bonds.
Constant Rate
A steady, unchanging value or percentage used in financial calculations, such as a fixed interest rate over time.
Required Return
The minimum expected return on an investment necessary for an investor to consider it worthwhile, taking into account the risk involved.
Stock Price
The current market price at which a share of a company is bought or sold.
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