Questions calculations.xlsx - Given Data Favorable...

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Given Data Favorable Unfavorable Equipment ($) ($) Sub 100 300,000 -200,000 Oiler J 200,000 -80,000 Texan 150,000 -40,000 (a) Ken Brown should use the Maximize Expected Monetary Value (EMV) model. Expected Value of Sub100 = 300000*0.7+(-200000)*0.3 = $ 150,000 Expected Value of Oiler J = 200000*0.7+(-80000)*0.3 = $ 116,000 Expected Value of Texan = 150000*0.7+(-40000)*0.3 = $ 93,000 Expected Value (EV) of Sub100 is the maximum. Therefore, optimal decision is to purchase Sub 100 (b) In order for Ken to change his decision, this figure has to be as low such that its expected value does not exceed the EV of next best alternative (Oiler J) Therefore, this figure has to be = (116000-(-200000)*0.3)/0.7 = $ 251,428 (c) Expected value = 150000*0.9 + (-100000)*0.1 = $ 125,000 Yes, Ken should change his decision from c , because the EV of Texan is higher than Oiler J now (Considering that payoff for favorable market for Sub 100 is 251428 as determined in part a) .
Calculations Equipment Favorable Unfavorable EMV Market Market Equipment ($) ($) Sub 100 300,000 -200,000 150000 Texan Oiler J 200,000 -80,000 116000 Texan 150,000 -40,000 93000 Probabilities 70% 30% Solving for X , X = = (116000-(-200000)*0.3)/0.7 X = $ 251,428
90% 10% 150000 -100000 125000 Favorable Market ($) Unfavorable Market ($) Expected Value
3-Year Lease Monthly Cost

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