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- 1. Calculate the Expected Monetary Value Analysis (EMV) for each strategy ASSIGNMENTQuestion 1 – 20 marksThe Pulsometer Pump Company makes concrete pumping equipment for the European market and is at present operating at near production capacity. The sales and marketing director of the company anticipates that the market for concert pumps will increase by 15% during the next twelve months. The board must decide how to react to this change in demand. There are three strategies that are being consideredS1 Install new equipment to improve productivity with a new system of workingS2 Institute overtime and weekend workingS3 Continue to work at capacity and let rivals or new firms satisfy the increased demand.A decision matrix can be constructed to show information (all columns show profits, in £000s).Market FactorsStrategy 15% Stable - 10%S1 240 130 0S2 210 150 70S3 170 150 70Use the Pay-off Matrix to make decision and inform what decisions should the board take? The company board satisfied with pay-off procedure however they are not confident with your decision. The sales and marketing director of the company now decided that “we need the probabilities associated with the change in market demands”. The probabilities areMarket Outcomes Probability (in %)15% Rise 0.6Stable 0.310% fall 0.1Calculate the Expected Monetary Value Analysis (EMV) for each strategy and use decision tree to show the best option. The board are impressed with decision method which has informed their decision making. They have assigned you to further investigation on the decision due to variability of returns and further measure of the degree of risk. You need support to do further investigation so that you can examine the sensitivity of decisions. A firm of consultants offer to survey the market for concrete pumps. This survey will lead to a revision of prior probabilities estimate of the likely market outcome. The survey will cost the company £5,000. The consultancy predictions records are shown belowConsultant`s Prediction (in %)Actual Market Outcome PriorProbabilities Rise Stable FallRaise 0.6 0.7 0.2 0.1Stable 0.3 0.2 0.6 0.2Fall 0.1 0.1 0.2 0.7Hint: The sum of getting a `Raise report` is given by the sum of the probabilities of getting a `Raise report` under each outcome multiplied respectively by the probability of getting that outcome.Use the Bayes Theorem to revise the consultant`s prediction. Should you choose to pay for this additional information? Produce a revised Decision tree for the board to make a decision. You should discuss on your decision on to use or not to use the consultant firm and each strategy.Part 1-Outcomes – 1 mark Page NumberIntroduction to problemPay-off matrices, decision and discussionEMV, Decision Tree and DiscussionBayes Theorem, step-by-step calculation, post probabilities table and discussionEach strategy probability and Decision treeFinal Decision(Maximum 500 words)Question 2 – 15 marksIn Week 5(using the
- 2. Decision-Making Examples manual), you developed a simple spreadsheet modelling for Acron, a large drug company. You answered several questions on company production of drugs and their effect on the financial investments(NPV). Now, use the fully developed spreadsheet (after completing the manual) and perform below changes on the model,Modify Acron`s model so that development lasts for an extra year. Specifically, assume that development costs of $7.2million and $2.1million are incurred at the beginnings of years 1 and 2, and then the sales in the current model occur one year later, that is, from year 2 until year 21. Again, calculate the NPV discounted back to the beginning of year 1, and perform the same sensitivity analyses. Comment on the effects of this change in timing.Modify Acron`s model so that sales increase, then stay steady, and finally decrease. Specifically, assume that the gross margin is $1.2million in year 1, then increases by 10% annually through year 6, then stays constant through year 10, and finally decreases by 5% annually through year 20. Perform a sensitivity analysis with a two-way data table to see how NPV varies with the length of the increase period (currently 6 years) and the length of the constant period(currently 4 years). Comment on whether Acron should pursue the drug, given your results.Create a one-way data table in the Acron model to see how the NPV varies with discount rate, which is allowed to vary from 8% to 18% in increments of 0.5%. Explain intuitively why the results go in the direction they go- that is, the NPV decreases as the discount rate increases. Should Acron Pursue the drug for all of these discount rates?Part 2-Outcomes- 1 mark Page NumberAnswers for 3 questions on the manualChanges to spreadsheet with costs, NPV, Sensitivity Analyses and DiscussionChanges to spreadsheet with cost, two-way data table, NPV, sensitivity analysis and discussionChanges to spreadsheet with cost, one-way data, discount factor changes with increments, discussion on changesShould Acron pursue the drug?(Maximum 500 words)Question 3 – 20 marksSuppose you own an expensive car and purchase auto insurance. This insurance has a $1000 deductible, so that if you have an accident and the damage is less than $1000, you pay for it out of your pocket. However, if the damage is greater than $1000, you pay the first $1000 and the insurance pays the rest. In the current year there is probability 0.025 that you will have an accident. If you have an accident, the damage amount is normally distributed with mean $3000 and standard deviation $750.Use Excel to simulate the amount you have to pay for damages to your car. This should be a one- line simulation, so run 5000 iterations by copying it down. Then find the average amount you pay, the standard deviation of the amounts you pay, and a 95% confidence interval for the average amount you pay. (Note that many of the amounts you pay will be 0 because you have no accidents).Continue, the simulation by creating a two-way data table, where the row input is the deductible amount, varied from $500 to $2000 in multiples of $500. Now find the average amount you pay, the standard deviation of the amounts you pay, and a 95% confidence internal for the average amount you pay for each deductible amount.Do you think it is reasonable to assume that damage amounts are normally distributed? What would you criticize about this assumption? What might you suggest instead?Part 3- Outcomes – 1 mark Page NumberSimple Excel model with descriptionDiscussion on the mean, standard deviation of normal distributionOne-line simulation, iterations, solutions and discussionTwo-way data table, solutions and discussionDiscussion on the
- 3. outcomes(Maximum 500 words)Question 4- 15 marksRefer to the Table 1 and do the following:Calculate the Expected activity time,Develop the Network diagram using the Expected activity time and use PERT Analysis to know the mean and Sd of the project.Based on these estimates and the resultant expected project duration of 44 weeks. The executive committee wants to know what is the probability of completing the project before a scheduled time of 46 weeks?What is the probability that the project lasts more than 46 weeks?What would be the completion time under which for the project has 85% probability of completing?How do you measure project risk exposure? Explain and propose ways to reduce the project risk exposure.(Maximum 500 words)