DMOP: Homework 4

Appshop, Inc.
Analyze the case, “Appshop, Inc.”.You will have to convert all the monetary values into present
values. You can use Excel’s functions to calculate the present values. The discounting rate, as given
in the case is 0.5% per month.

Address the following questions based on the case.

1. List the decision alternatives for Appshop.

2. Calculate the expected value, variance and standard deviation for the bonus option, i.e.,
$125,000 a month plus $1.5 million bonus paid at the end of month 24, using the
probabilities given (analytical solution).
3. Carry out the simulation of the bonus option using @Risk. Compare the expected value,
variance and standard deviation obtained from the simulation with the analytical solution
obtained in question 2 above.
4. Carry out a two-sided hypothesis test, with an α of your choice, using the average obtained
from the simulation in question 3 above as 𝑋 and the expected value obtained from the
analytical solution as µ0. Comment on the result of the hypothesis test.
5. Carry out the simulation for the RFP option. What is the expected pay-off for the RFP
option? What is the variance, maximum, minimum of the pay-offs based on the simulation?
6. Draw the decision tree for Appshop detailing the various decision alternatives and the
chance occurrences. Use Precision Tree to analyze the decision tree. Use the expected
value obtained from simulation in question 5 above, for the appropriate branch in the
decision tree.
7. Should you use the same seed for the simulations in questions 3 and 5? Explain why or why
not.
8. Compare the three decisions alternatives,– (1) fixed payment plan of $155,000 per month,
(2) Bonus plan (based on simulation carried out in question 3 above) and (3) RFP (based on
the simulation carried out in question 5 above), preferably in a tabular form,.
9. Comment on the risk involved with the three decision alternatives based on the comparison
in question 8 above
10. What is your final recommendation to Eric Clark?

Submit your answers in a Word/PDF file. Attach a copy of the excel sheet with the decision tree
drawn using Precision Tree as well as the simulation using @Risk.