Dar es Salaam CPA REVIEW Center B5-Performance Management CPA (T) DAVID D KIWIA

Question One
A real estate developer owns a parcel of land adjacent to a larger tract that will soon be rezoned for industrial
use, for office park or for residential purposes. The developer must decide before the zoning decision by the
local authorities is made whether to develop his property for a grocery store, restaurant or gasoline service
station respectively.

If the industrial zoning decision is a reality, the developer will lose Tshs. 2,000,000 with a grocery
store, but will get Tshs. 1,800,000 for restaurant and 2,500,000 for gasoline service station
respectively.
If the office park zoning station is made, the developer’s payoff will be Tshs. 1,000,000. Tshs.
5,000,000 and Tshs. 1,500,000 for grocery, restaurant and gasoline service station respectively.
In case restaurant decision holds, grocery business will earn the developer Tsh. 6,000,000: while
the restaurant and gas service station business will be money loser to the tune of Tshs. 1,500,000
and 2,000,000 respectively.

Required
i) Advice the developer on the decision to take using
a) The maxmax criterion
b) The maxmin criterion
c) The minmax regret criterion

ii) Given that the developer has estimate that there is 40% chance of the land will be zoned for industrial
use, 25% chance that it will be for office park and 35% the land will be zoned for residential purposes,
advice the developer on the decision to take using;
a) Use the Expected Monetary Value (EMV) decision criterion
b) Use the Expected Opportunity Loss (EOL) decision criterion
c) Use the maximum likelihood criterion
d) Use the rationale criterion

Kiwia, David D. CPA-T, BAF, MFA-OG, PhD (ip) Email. kiwiadavid09@gmail.com Cell 0716 734 577
Dar es Salaam CPA REVIEW Center B5-Performance Management CPA (T) DAVID D KIWIA
Question Two
Sarah Co. Ltd trade perishable items. Each item costs Tshs. 1,500 and is sold at 2,500. Any items not sold at
the end of the day is disposed-off for Tsh. 1,000. In additional to that, if Sarah Co. Ltd does not satisfy any
demand she has to pay Tshs. 200 for each unit not satisfied. The company forecasts the following daily
demand level for the item:

20,000, 30,000, 40,000, 50,000 and 60,000.

i) Advice Sarah Co. Ltd on the optimal supply level using;
a) The maxmax criterion
b) The maxmin criterion
c) The minmax regret criterion

ii) If mostly likely demand is 40,000 items and the demand for 20,000 units is as half as likely; the
demand for 30,000 units is three quarters as likely. The demand for 50,000 units is one quarter as likely
and the demand for 60,000 units is half as likely.
Required:
a) Use the EMV decision criterion to choose the optimal supply level
b) Use the EOL criterion to choose the optimal supply level
c) Use the maximum likelihood criterion to choose the optimal supply level
d) Use the rationale criterion to choose the optimal supply level

Question Three
Moshi Cement Company is considering issuing 100,000 shares to raise capital needed for expansion. It is
estimated that, if the share were made now it would be fully taken up to the price of Tshs. 300/= per share.

However, the company is facing two crucial situations, both of which may influence the share price in the
nearly future, namely:

a) A salary dispute with labourers, which could lead to a strike and have an adverse effect on share
price.
b) The possibility if a substantial contract with a large Company overseas which would increase the
share price.

The four outcomes and their expected effect on the Company’s share price at the DSM Stock Exchange
market are:

E1: NO strike and contract obtained - Share price rises to Tshs.340/=

E2: Strike and contract obtained - Share price stay at Tshs.300/= 4|P age

Kiwia, David D. CPA-T, BAF, MFA-OG, PhD (ip) Email. kiwiadavid09@gmail.com Cell 0716 734 577
Dar es Salaam CPA REVIEW Center B5-Performance Management CPA (T) DAVID D KIWIA
E3 No Strike and contract lost - Share price rise to Tsh.320/= E4
Strike and Contract lost - Share price fall to Tshs.160/=

Management has identified three possible strategies that the company could adopt, namely:
S1: Issue 100,000shares now

S2: Issue 100,000 shares only after outcomes of (a) and (b) are known
S3: Issue 50,000 shares now and 50,000shares after the outcomes of (a) and (b) are known
Required
a) Draw up a payoff table for the company and determine the minimax regret solution. What other
criteria might be used?
b) It can be estimated that the probability if strikes is 55% and that there are 65% chance if getting the
contract these probabilities being independent. Determine the optimum policy for the company
using the criterion of maximizing expected payoff, Expected Opportunity Loss and maximum
likelihood criterion.
c) Determine the expected value of perfect information for the company and how maximum expected
payoff value, the expected value of perfect information and Minimum expected opportunity los are
related

4|P age

Kiwia, David D. CPA-T, BAF, MFA-OG, PhD (ip) Email. kiwiadavid09@gmail.com Cell 0716 734 577