Background

A construction company is planning ahead and will undertake one of four strategies –
dependent on the economic outlook. The data in Table 1 gives the Net Present Values (NPV, $
million) estimated by the company for the four alternative strategies [A, B, C, D] in relation to
the economic outlooks.
Economic outlook
Strategy Excellent Average Poor
A 30 25 -15
B 15 15 15
C 35 30 -5
D 45 10 -5
Table 1: NPVs ($ million)

Determine which strategy (and why) the company should select if they use the following
criteria

a) Maximin (2 marks)
b) Maximax (2 marks)
c) Laplace (2 marks)
d) Hurwicz (with a = 0.8) (2 marks)
e) Minimax Regret (2 marks)

f) New information suggests the probabilities of Excellent, Average and Poor

economic outlooks are 0.3, 0.6 and 0.1 respectively. Given this - on the basis of
Expected Monetary Value, what strategy (and why) should be considered as the best
alternative? (4 marks)

g) Plot a sensitivity analysis from the Table 1 data, and provide comment. (4 marks)
 Economic outlook

Excellen Averag
Strategy t e Poor

A 30 25 -15

B 15 15 15

C 35 30 -5

D 45 10 -5

Maximin

Economic outlook

Excellen Averag Minimu

Strategy t e Poor m

A 30 25 -15 -15

B 15 15 15 15

Decisio Choose Strategy

C 35 30 -5 -5 n B

D 45 10 -5 -5

maximu
m 15

Maximax

Economic outlook

Excellen Averag Maximu

Strategy t e Poor m

A 30 25 -15 30

B 15 15 15 15

C 35 30 -5 35

D 45 10 -5 45 Decisio Choose Strategy

 n D

maximu
m 45

Laplace

Economic outlook

Excellen Averag
Strategy t e Poor Average

A 30 25 -15 13.33

B 15 15 15 15.00

Decisio Choose Strategy

C 35 30 -5 20.00 n C

D 45 10 -5 16.67

maximu
m 20

Hurwicz (with a = 0.8)

Economic outlook Weighted Average

Excellen Averag
Strategy t e Poor

A 30 25 -15 27

Decisio Choose Strategy

B 15 15 15 9 n D

C 35 30 -5 29

D 45 10 -5 37

Minimax Regret

Economic outlook

Excellen Averag
Strategy t e Poor

A 30 25 -15
B 15 15 15

C 35 30 -5

D 45 10 -5

Regrets

Excellen Averag Maximu

Strategy t e Poor m

A 15 5 30 30

B 30 15 0 30

Strategy C and
C 10 0 20 20 Regret D

D 0 20 20 20

Minimu
m 20

Expected Monetary Value

Economic outlook

0.3 0.6 0.1

Excellen Averag
Strategy t e Poor EMV

A 30 25 -15 22.5

B 15 15 15 15

Decisio Choose Strategy

C 35 30 -5 28 n C

D 45 10 -5 19

a) Describe what is meant by “the index of optimism”.

Gallup's Investor Optimism Index measures investors' optimism in the economy and their
personal finances. The indicator is based on a variety of factors, including economic growth,
unemployment, stock market performance, and inflation expectations.
 Question 2(a) Given all of the above background information, draw a decision tree and state
what is the best decision (and why)

Vertical well is better option because it has no problems exist.

 Question 2(b) Given the above information - draw the decision tree representation of the
scenario and detail the possible outcomes and which one should be chosen (and why)?

                   
  No Horizontal well

 
  $15.00 $15
 

  0.5
$18 Cost
 
  Horizontal well 5 20
 
  $15.00 17.5 0.5
  No Cost
 
  0 15
                   

Horizontal well cost increased as well as failure rate also increase

Question 2(c)
Given the above information - draw the decision tree representation of the scenario and detail
the possible outcomes and which one should be chosen (and why)?

              0.5      
  Failing  

  3
  Horizontal Walls 3 3  
   
  0 2 0.5  
  Non Failing  
  1
  1 1  
2  
   
  Decision 2  
  0
  0 0  
                     

Horizontal well cost increased as well as failure rate also increase to 3:4
 Question 2(d)
What is the value of the geological testing information? Please provide two values, so one
before and one after the record of the performance of the geologist’s performance is obtained.

It is possible to use a geological understanding to help resolve difficulties related to sustainable

development, such as land degradation and groundwater contamination. Each investigation has
a unique scope, and as a result, the results of one investigation cannot be compared to the
results of another investigation. Before this study, the concept of future (as opposed to current)
consumers, as well as the concept of averted costs, were not considered uniformly throughout
studies.
Question 2(e)
Explain the differences between Expected Utility Value and Expected Monetary Value.

The expected utility of a variable is equal to the sum of all conceivable outcomes, weighted
by their respective probabilities, divided by the number of possibilities that are likely to
occur in the future. It is possible to predict how near the average roll will be to the expected
value by using the expected value. It shows you how much something is worth to you in
terms of money based on the projected utility.