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Decision Analysis

You have the opportunity to expand your specialty freight business by purchasing or leasing an additional aircraft.
You have determined the most suitable type of aircraft is a Shorts AirVan. You have calculated the increase in net profit over the next three years with this aircraft for five estimates of industry activity:

? rapid growth
? moderate growth
? slight to no growth
? slight decline
? and moderate decline

If you buy, your estimates of profitability increase are, respectively:

? $200k
? $100k
? -$40k
? -$80k
? -$150k

If you lease, your estimates are:

? $100k
? $50k
? -$20k
? -$40k
? -$60k

Of course you have the option to do neither.

a. If you have no good idea of the future of the market and you wish to make the choice that will maximize maximum profitability you will chose to_____________?

b. If you wish to chose the alternative that will minimize possible loss you will__________________?

c. If you estimate, based on your observations of the industry climate, the following probabilities for business growth:

? rapid growth .1
? moderate growth .3
? slight to no growth .3
? slight decline .2
? moderate decline .1

which alternative is indicated?

Solution Summary

The solution is comprised of a detailed explanation of the various aspects of Decision Analysis. This step-by-step calculation of these complicated topics provides students with a clear perspective of Maximax Criterion, Maximin Criterion and Expected Value Criterion.