Amine Bekki

ID: 201404262
Assignment 3

Problem 1: ex 5.13:
We have 3 options
1. Low tech
a. 0.3: 45,000 + (200,000 * 0.55) = 155,000
b. 0.4: 45,000 + (200,000 * 0.50) = 145,000
c. 0.3: 45,000 + (200,000 * 0.45) = 135,000
So the EMV for low tech is : 0.3*155000+0.4*145000+0.3*135000=$145000
2. Sub-contract
a. 0.7: 65,000 + (200,000 * 0.45) = 155,000
b. 0.2: 65,000 + (200,000 * 0.40) = 145,000
c. 0.1: 65,000 + (200,000 * 0.35) = 135,000
So the EMV for sub contract is: 151000$
3. High tech
a. 0.9: 75,000 + (200,000 * 0.40) = 155,000
b. 0.1: 75,000 + (200,000 * 0.35) = 145,000
So the EMV for high tech is: 154000$
So we choose the low technology method because it has the lowest estimated cost of
145000

Problem 2: Ex 5.15:
We have 3 choices: produce the elegant, the deluxe or do nothing,
1. elegant
1.a: 0.5: good market: 400*125-35,000=15,000
1.b: 0.5 : bad market: 300*90-35,000=-8,000
So EMV for elegant is : $3500
2. deluxe:
2.a: 0.5: good market : 500*100-35,000=15,000
2.b: 0.5 : bad market: 400*70-35,000=-7,000
So EMV for deluxe is : $4000
3. do nothing: 0
so we decide to take the deluxe option, because it has the highest EMV:$4000

Problem 3: Faraya:
The final answer is to buy only one lift, the explanation is below.
We will go about this decision by devising a decision tree.
We have the revenue at capacity of every life is : 14 weeks*7days*250places*20$
=$490,000
We have 3 choices: buy 1 lift, 2 lifts, and do nothing. In the first 2 choices, we have 3
economic conditions. Bad, normal , and really good.
We should calculate the EMV for each choice,
1- for do nothing, the EMV is 0
2- for buy 1 lift: we have 3 senarios
2.a bad economy: (0.3): profit = revenue cost = 90%*490,000 (200,000 +
50,000) = $191,000
2.b normal (0.5): profit = 100%*490,000 250,000 = $240,000
3.c really good (0.2): profit = 100%*490,000 250,000 = $240,000
So EMV for buying 1 lift = 0.3*191000+0.5*240000+0.2*240000 = 225,300$
3: buying 2 lifts: we have 3 senarios
3.a : bad economy: profit = (90%*490,000+0%* 490,000) ( 2*200,000 + 90,000) =
-49,000$
3.b: normal economy: profit = (100%*490,000+50%* 490,000) ( 2*200,000 +
90,000) =245000$
3.c: really good: profit= (100%*490,000+90%* 490,000) ( 2*200,000 + 90,000)
=441000$
So EMV for buying 2 lifts is : 0.3*-49000+0.5*245000+0.2*441000=196000$
So we pick the highest EMV, which is to buy only 1 lift, as its EMV is higher than the EMV of
buying 2 lifts, and higher than the EMV of doing nothing