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Starting Right:

There are two events: a favorable market (event 1) and an unfavorable market (event 2). There are four alternatives, which include do nothing (alternative 1), invest in corporate bonds (alternative 2), invest in preferred stock (alternative 3), and invest in common stock (alternative 4). The decision table with returns is presented below.

Alternative 1 Alternative 2 Alternative 3 Alternative 4 Maximin Alternative 1 2 3 4

Event 1 0 25,273 90,000 210,000

Event 2 0 -10,000 -15,000 -30

Expected Value 0 -10,000 -15,000 -30,000

Best: Alternative 1 Maximax Alternative 1 2 3 4 Maximax Payoff 0 25,273 90,000 210,000

Best : Alternative 4 Hurwicz alpha coefficient: 0.110 Minimax Alternative 1 Maximum Regret 210,000

2 3 4 Best : Alternative 4

184,727 120,000 30,0

Ans 1: a. Sue Pansky is a risk avoider and should use the maximin decision approach. She should do nothing and not make an investment in Starting Right. Ans 2: Ray Cahn should use a coefficient of realism of 0.11. The best decision is to do nothing. Ans 3: Lila Battle should eliminate alternative 1 of doing nothing and apply the maximin criterion. The result is to invest in the corporate bonds. Ans 4: George Yates should use the equally likely decision criterion. The best decision for George is to invest in common stock. Ans 5: Pete Metarko is a risk seeker. He should invest in common stock. Ans 6: Julia Day can eliminate the preferred stock alternative and still offer alternatives to risk seekers (common stock) and risk avoiders (doing nothing or investing in corporate bonds).

Case Study 2 Abbreviations and values used in the following decision trees: Normal - proceed with research and development at a normal pace 6 Month - Adopt the 6-month program: if a competitors product is available at the end of 6 months, then copy; otherwise proceed with research and development. 8 Month - Adopt the 6-month program: proceed for 8 months; if no competition at 8 months, proceed; otherwise stop development Success or failure of development effort: OkDevelopment effort ultimately a success NoDevelopment effort ultimately a failure Column: SSales revenue Rresearch and development expenditures EEquipment costs IIntroduction to market costs

Market size and Revenues: Without Competition SSubstantial MModerate LLow (P = 0.1) (P = 0.6) (P = 0.3) $800,000 $600,000 $500,000 With Competition $400,000 $300,000 $250,000

Competition: C6Competition at end of 6 months (P = .5) No C6No competition at end of 6 months (P = .5) C8Competition at end of 8 months (P = .6) No C8No competition at end of 8 months (P = .4) C12Competition at end of 12 months (P = .8) No C12No competition at end of 12 months (P = .2)

The optimal program is to adopt 6-month program