Topic 6.6: Multinational Companies (MNCs) Questions

State two components that must be included in a decision tree.

What is the difference between a decision node and a chance node?

A project has a 60% chance of earning $50,000 and a 40% chance of earning $10,000. Calculate the expected monetary value of the project (show all your working).

Explain the difference between a decision node and a chance node in a decision tree.

A project costs $20,000 to launch. It has a 50% chance of earning $70,000 and a 50% chance of earning $10,000. Calculate the net expected value of the project (show all your working).

A manager sketches a diagram of the options open to her, the uncertain events that could follow each one, and the money each ending would bring in. What has she sketched?

Kestrel Kayaks hires out kayaks on a lake. It is considering a second hire base on the coast (Option 2), which would cost $40,000. Table 1 shows the owner’s forecast for Option 2. | Outcome | Probability | Forecast return ($) | |---|---|---| | Good summers | 0.6 | 90,000 | | Average summers | 0.3 | 50,000 | | Poor summers | 0.1 | −20,000 | Using Table 1, calculate the expected return of Option 2 after its $40,000 cost (show all your working).

What does expected monetary value measure?

Which two pieces of information must appear on a decision tree before any expected value can be worked out?

Outline what is meant by expected monetary value (EMV).

Sunpath Solar fits solar panels on homes and is considering fitting them on office roofs (Option 1), at a cost of $80,000. | Outcome | Probability | Forecast return ($) | |---|---|---| | High demand | 0.5 | 150,000 | | Medium demand | 0.3 | 90,000 | | Low demand | 0.2 | 20,000 | Using the table, calculate the net expected value of Option 1 (show all your working).

Mapleview Dental runs one clinic and is considering a second (Option 1), with a forecast cost of $1.5 m. | Outcome | Probability | Forecast return ($ m) | |---|---|---| | Success | 0.7 | 2.4 | | Limited success | 0.3 | 0.9 | Using the table, calculate the net predicted outcome of Option 1 (show all your working).

Define the term decision tree.

Why might the probabilities used in a decision tree be unreliable?

An option has a 0.6 chance of a 200 000 payoff and a 0.4 chance of a 50 000 payoff. Calculate its expected value.

Construct the expected values for two options: A has 0.6 of 200 000 and 0.4 of 50 000, costing 30 000; B has 0.5 of 300 000 and 0.5 of 0, costing 60 000.

Construct a decision tree comparison for three options and state which is preferred: A 0.6 of 200 000 / 0.4 of 50 000, cost 30 000; B 0.5 of 300 000 / 0.5 of 0, cost 60 000; C certain 95 000, cost 0.

Explain one advantage of using a decision tree when a business faces an uncertain decision.

Explain one limitation of using expected monetary value (EMV) to choose between options.

Rafael runs the Coldwater Hotel by the sea. He is choosing between a $300,000 spa and ten more rooms costing $400,000, and he estimates that tourist numbers have a 0.6 chance of rising and a 0.4 chance of falling. Explain one advantage for Rafael of using a decision tree.