Decision Analysis Case Study

Problem Statement

Jim Kelly, a corporate raider, has acquired a textile company and is contemplating the future of one of its major plants, located in Downtown Silver Spring, Maryland. Three alternatives decisions are being considered: (1) expand the plant and produce and produce lightweight, durable materials for possible sales to the military, a market with little foreign competition; (2) maintain  the status quo at the plant, continuing production of textile goods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first two alternatives is chosen, the plant will still be sold at the end of a year. The amount of profit that could be earned by selling the plant in a year depends on foreign market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this decision.

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  State of Nature
 

Decision

Good Foreign

Competitive Conditions

Poor Foreign

Competitive Condition

Expand $900,000 $600,000
Maintain status quo 1,400,000 -150,000
Sell now 420,000 420,000

 

  1. Determine the best decision by using the following criteria:
  2. Maximax
  3. Maximin
  4. Minimax regret
  5. Huwicz (α = 0.3)
  6. Equal likelihood
  7. Assume that it is now possible to estimate a probability of 0.70 that good foreign competitive conditions will exist and a probability of 0.30 that poor conditions will exist. Determine the best decision by using expected value and expected opportunity loss.
  8. Compute the expected value of perfect information
  9. Develop a decision tree, with expected values at the probability nodes.

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