Cabacaba, Kyle France P. ACT201 Case Studies A. Starting Right Corporation Discussion Questions: 1. Sue Pansky, a retired elementary school teacher, is considering investing in Starting Right. She is very conservative and is a risk avoider. What do you recommend? a. For Sue Pansky, a conservative and risk-averse investor, a suitable investment decision model would be the maximin model. The maximin model suggests that we should choose the alternative that maximizes the minimum possible outcome. Since Sue is risk averse, the bonds would be the best for her since it returns a guaranteed minimum amount of 20,000. 2. Ray Cahn, who is currently a commodities broker, is also considering an investment, although he believes that there is only a 15% chance of success. What do you recommend? a. For Ray Cahn, who believes that there is only a 15% chance of success, the preferred stock option may be the best choice. The preferred stock option offers the potential for a five-fold return with a good market, and Ray may be willing to take on more risk for the potential higher return. However, if Ray is risk averse, he may prefer the corporate bonds option for the guaranteed return. 3. Lila Battle has decided to invest in Starting Right. While she believes that Julia has a good chance of being successful, Lila is a risk avoider and very conservative. What is your advice to Lila? a. For Lila Battle, a risk-averse and conservative investor who believes that Julia has a good chance of being successful, a suitable investment decision model would be the minimax regret model. The minimax regret model suggests that we should choose the alternative that minimizes the maximum regret. Since Lila is absolutely risk averse, the bonds would be best for her since it returns a guaranteed minimum amount of $20,000. 4. George Yates believes that there is an equally likely chance for success. What is your recommendation? a. For George Yates, who believes that there is an equally likely chance for success or failure, a suitable investment decision model would be the expected utility model. The expected utility model suggests that we should choose the alternative that has the highest expected utility, which takes into account both the expected outcome and the investor's risk aversion. In this case, George should assess the potential outcomes of investing in Starting Right and choose the alternative that maximizes his expected utility. George should go for preferred stock which has an equally likely chance of success and failure. 5. Peter Metarko is extremely optimistic about the market for the new baby food. What is your advice for Pete? a. For Peter Metarko, who is extremely optimistic about the market for the new baby food, a suitable investment decision model would be the sensitivity analysis model. The sensitivity analysis model suggests that we should analyze the impact of changes in assumptions or variables on the decision. Peter should go for common stock which offers the highest return for a chance of success which is very high, which suits Peter's risk appetite. 6. Julia Day has been told that developing the legal documents for each fundraising alternative is expensive. Julia would like to offer alternatives for both risk-averse and risk-seeking investors. Can Julia delete one of the financial alternatives and still offer investment choices for risk seekers and risk avoiders? a. Julia Day can delete one of the financial alternatives and still offer investment choices for risk-seekers and risk-avoiders. She can offer different levels of risk for each investment alternative instead of offering two different investment alternatives. For example, she could offer a low-risk investment option and a high-risk investment option for each financial alternative, providing investors with a range of options that cater to their risk preferences. B. Toledo Leather Company Discussion Questions: 1. Using a decision tree based on maximizing expected profit, decide which machine Toledo Leather should select. Should overtime be scheduled? Or should a machine be modified and, if so, under what circumstances? Decision Tree / Semi-Automatic (Machine 1) / | \ / | \ / | \ 120,000 130,000 140,000 / / / \ / / / \ / / / \ $240,000 $260,000 $280,000 |---[Overtime]----> $288,000 | |---[Modify]------> $285,000 \ Automated (Machine 2) | \ | \ | \ 140,000 150,000 / \ / \ / \ / \ / \ / \ $385,000 $412,500 | |---[Overtime]----> $431,000 | |---------[Modify]------> $420,000 Machine 1: Semi-Automatic Capacity = (640 units per day * 5 days per week * 50 weeks per year) * ⅞ (⅛ is downtime) = 140,000 units Sales price = $6/unit Total Cost per Case (without overtime) = Fixed cost + Variable cost = 1.5 (material) + 2.5 (variable) = $4 Total Cost per Case (with overtime) = Fixed cost + Variable cost = 1.5 (material) + 2.5 (variable) + 1.2 (overtime cost) = $5.2 Machine costs = $250,000 Cost to modify = $15,000 Node Demand Calculation Profit 3 120000 = (S6 - $4) • 120000 240000 4 130000 = (S6 - $4) • 130000 260000 5 140000 = (S6 - $4) • 140000 280000 150000 (overtime) = 280000 + (S6 - $4) 288000 • 100000 150000 (modify) = (S6 - $4) • 150000 - 285000 15000 160000 (overtime) = 288000 + (S6 - $4) • 100000 160000 (modify) = (S6 - $4) • 160000 - 305000 15000 6 6 7 7 296000 Machine 2: Automated Capacity = (800 units per day * 5 days per week * 50 weeks per year) * ¾ (¼ is downtime) = 150,000 units Sales price = $6/unit Total Cost per Case (without overtime) = Fixed cost + Variable cost = 1.5 (material) + 1.75 (variable) = $3.25 Total Cost per Case (with overtime) = Fixed cost + Variable cost = 1.5 (material) + 1.75 (variable) + 0.9 (overtime cost) = $4.15 Machine costs = $350,000 Cost to modify = $20,000 Node 8 9 10 11 13 14 Demand Calculation Profit 120000 = (S6 - $3.25) • 120000 330000 130000 = (S6 - $3.25) • 130000 357500 140000 = (S6 - $3.25) • 140000 385000 150000 = (S6 - $3.25) • 150000 412500 160000 (overtime) = 412500 (S6 - $4.15) 431000 • 10000 160000 (modify) = (S6 - $3.25) • 160000 - 20000 420000 2. Set up a payoff matrix for the sales volumes given (assume the machines cannot be modified and overtime is used), and assume that the probabilities for the five levels of sales are not known. Then decide which machine should be purchased using the maximax criterion, the maximin criterion, and the equally likely criterion. ➢ Maximax: This criterion involves selecting the option that maximizes the maximum payoff. In other words, we choose the option that has the highest potential outcome. Looking at the decision tree, we can see that the maximum payoff for Machine 1 is $288,000, and the maximum payoff for Machine 2 is $431,000. Therefore, based on the maximax criterion, we should choose Machine 2. ➢ Maximin: This criterion involves selecting the option that maximizes the minimum payoff. In other words, we choose the option that has the highest guaranteed outcome, even if it is not the highest possible outcome. Looking at the decision tree, we can see that the minimum payoff for Machine 1 is $240,000, and the minimum payoff for Machine 2 is $385,000. Therefore, based on the maximin criterion, we should choose Machine 2. ➢ For the equally likely criterion: - Machine 1: (240000 * 0.2) + (260000 * 0.2) + (280000 * 0.2) + (288000 * 0.2) + (305000 * 0.2) = $276600 - Machine 2: (330000 * 0.2) + (357500 * 0.2) + (385000 * 0.2) + (412500 * 0.2) + (431000 * 0.2) = $383900 Therefore, according to the equally likely criterion, we should choose Machine 2 since it has the higher expected value. In summary, based on the decision criteria, we should choose Machine 2. C. Blake Electronics Discussion Questions: 1. Does Steve need additional information from Iverstine and Walker? Steve requires additional information to introduce a new product in the market, which could be a risky endeavor due to the company's diminished reputation. The introduction of the new product necessitates thorough market research and analysis. Steve must implement more effective advertising techniques to generate awareness about the product. The company is embarking on a new venture, and the manufacturing process requires precise specifications. Steve requires more comprehensive and accurate reports to make informed decisions. As he is entering a new product market under his brand name, he must ensure the research information provided by Iverstine and Walker is correct. Marketing and advertising are crucial components of the company's success, and Steve must pay close attention to the ground reports to make informed decisions. 2. What would you recommend? My recommendation is to conduct a comprehensive analysis of research reports. Marketing plays a critical role in effectively placing a product in the market. Through marketing, the company can establish a strong product awareness, draw attention to the product, and differentiate it from competing products. Product placement is a valuable asset for any company, and the marketing strategy should create a favorable image of the product. This will create a demand for the product in the market. The product design should be attractive, which will elevate its status as a symbol of distinction. Since Steve is entering a new market venture of home appliances, he needs to focus on designing the product in a way that enhances the aesthetic appeal of the room.
