SOLVED

46) Steve Gentry, the operations manager of Baja Fabricators, wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard). However, because the price of crude oil is depressed, the market for such equipment is down. Steve believes that the market will improve in the near future and that the company should expand its capacity. The table below displays the three equipment options he is currently considering, and the profit he expects each one to yield over a two-year period. The consensus forecast at Baja is that there is about a 30% probability that the market will pick up “soon” (within 3 to 6 months) and a 70% probability that the improvement will come “later” (in 9 to 12 months, perhaps longer). Profit from Capacity Investment (in Dollars) Equipment Option Market picks up “soon” p = 0.30 Market picks up “later” p = 0.70 Manual Machine -120,000 210,000 NC Machine 140,000 160,000 CNC Machine 200,000 -200,000 a. Calculate the expected monetary value of each decision alternative. b. Which equipment option should Steve take? 47) Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. States of Nature Alternatives Lower gas prices Gas prices unchanged Higher gas prices Probability .3 .5 .2 Subcompact $16,000 $21,000 $23,000 Compact $15,000 $20,000 $22,000 Full size $18,000 $19,000 $6,000 Calculate the expected monetary value for each decision alternative. Which decision yields the highest EMV? 48) Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $110 per day in fair weather, $20 per day in foul weather. At home, he will profit $70 in fair weather, $50 in foul weather. Assume that on any particular day, the weather service suggests a 60% chance of fair weather. a. Construct Earl’s payoff table. b. What decision is recommended by the expected monetary value criterion? c. What is the EVPI? 49) The campus bookstore sells stadium blankets embroidered with the university crest. The blankets must be purchased in bundles of one dozen each. Each blanket in the bundle costs $65, and will sell for $90. Blankets unsold by homecoming will be clearance priced at $20. The bookstore estimates that demand patterns will follow the table below. a. Build the decision table. b. What is the maximum expected monetary value? c. How many bundles should be purchased? Demand level Probability 1 bundle 10 percent 2 bundles 30 percent 3 bundles 50 percent 4 bundles 10 percent