Please solve it and show all formulas and calculations Thanks in Advance Questio

Question

Please solve it and show all formulas and calculations

Thanks in Advance

Question 2: A company has to make a decision regarding production capacity to meet the growing demand and the estimated returns in $for different alternatives are given. Scenario Course of Action/Demand High demand 500 700 200 Medium demand Low Demand Expand Build New Plant Subcontract a) The company's Marketing manager estimates that there is a 60% chance for high 400 200 150 150 -300 50 demand, 30% for medium demand and 10% for low demand. Assuming that the company's objective is to maximize expected net present value, determine the course of action it should take; b) Before the decision is made, the results of a long term forecast becomes available. These suggests that demand will continue to rise at the present rate. Estimates of the reliability of this forecast are given below P(forecast predicts demand increasing at current rate when actual demand will be high) -0.3 P(forecast predicts demand increasing at current rate when actual demand will be medium) 0.7 P(forecast predicts demand increasing at current rate when actual demand will be low) 0.4 Demonstrate whether the company should, in the light of the forecast, change from the decision you advised in (a)

Explanation / Answer

Ans:-

a). Estimated return from different alternatives at 60% chance for high demand, 30% for medium demand and 10% for low demand is given below:-

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Since the maximum return is expected by building new plant, so the company should follow it.

b). Applying all the probabilities, 0.3 for high demand, 0.7 for medium demand, 0.4 for low demand. Estimated return can be given as:-

So in this case company should consider an option to expand.

High demand Medium demand Low demand Total Return Expand 300 120 -15 405 Build new plant 420 60 -30 450 Subcontract 120 45 -5

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