Tempe is considering replacing its fleet of gasoline powered cars with electric cars. The manufacturer of the electric cars clai

ms a significant cost savings over the life of the fleet if Tempe chooses to pursue the conversion. If the manufacturer is correct, the city will save about $1.5 million. However, some critics argue that the technology is faulty and will result in significantly higher costs – estimated at a loss of $700,000 over the life of the fleet compared to gasoline-powered cars. A third possibility, suggested by independent analysis of an engineering firm last year is that the conversion will breakeven. A consultant hired by the city to assess the conversion program estimates the probabilities of the three outcomes – savings, loss, breakeven – at 30%, 30%, 40%, respectively.
The city has the opportunity to implement a pilot program that involves renting a small number of electric cars for three months and running them under typical conditions. This program would cost the city $75,000. The city consultant believes the pilot program results will be useful for estimating the value of the conversion, but not conclusive. She has prepared the following table of probabilities based on the experience of other cities after 3 months of usage. For example, given that a conversion actually results in savings of $1.5 million, the conditional probabilities that the pilot will indicate that the city saves money, loses money, and breaks even are 60%, 10% 30%, respectively.
Indication of outcome from pilot program Actual outcome over the life of the fleet
Savings Loss Breakeven
Indicates Savings 60% 10% 40%
Indicates loss 10% 40% 20%
Indicates breakeven 30% 50% 40%
Questions:
a. Assuming the city wishes to use expected payoff as the criterion for decision making, use Precision Tree to construct and solve a neatly labeled decision tree for Tempe's decision problem. Express the optimal strategy erbally and state the corresponding optimal expected payoff.
b. Does your recommended strategy from part (a) change if the city is risk averse with a risk tolerance parameter of $1 million (with an exponential utility function)? Express the optimal strategy verbally and state the corresponding optimal expected payoff and the certainty equivalent.

Business

You might be interested in

Mart's Boutique has sales of $820,000 and costs of $540,000. Interest expense is $36,000 and depreciation is $59,000. The tax ra

Mariulka [3825]

Answer:

$146,150.00

Explanation:

Net income is calculated after taxes.

Here,

Sales = $820,000.00

Less: Expenses = -$540,000.00

Gross profit = $280,000.00

Less: Financial Expenses

Interest = -$36,000.00

Depreciation = -$59,000.00

Net profit before tax = $185,000.00

Less: Tax at 21% of $185,000.00 = - $38,850.00

Net Income (after taxes) = $146,150

Net income is always determined after accounting for tax.

$146,150.00

3 0

2 months ago

The depreciable life of an asset is of concern to the financial manager. In general:_______.a) a longer depreciable life is pref

harina [3808]

The depreciable life of an asset is crucial for the financial manager. Generally, a shorter depreciable life is advantageous, as it leads to quicker cash flow circulation. This concept of depreciation allows for the expense of financial or intangible resources to be allocated over their useful lives. It indicates the extent to which an asset's value diminishes over time. For both taxation and accounting, long-term assets can be depreciated, and the duration allocated to these assets significantly influences the cash flow. Hence, shorter depreciable lives are more favorable compared to longer ones due to the expedited influx of cash for finance managers.

6 0

3 months ago

Meryl, a training manager, is making a presentation to her company's business leaders. She says meeting the company's five-year

Katen [3525]

Answer:

The appropriate answer is "the company has not allocated enough funds for training".

Situational constraints refer to factors that negatively influence behavior and performance by imposing restrictions on personal qualities and motivation. For instance, lack of resources such as equipment or money. In this case, both employees and supervisors are keen to learn about new technology, but the main constraint preventing the achievement of this goal is the company's insufficient budget for training.

6 0

2 months ago

Of the approaches to pursuing international markets, developing a ________ involves the greatest commitment and risk. joint vent

arsen [3447]

Answer:

D. Foreign Subsidiary

Explanation:

A Foreign Subsidiary is a firm that's either partially or fully owned by a larger corporation headquartered in a different nation. This indicates that the company did not organically establish development or begin operations in the nation where it operates. Establishing foreign subsidiaries is a key method for entering international markets, which entails significant risk and commitment compared to other methods listed in the question, due to considerations like costs and time for setting up a foreign subsidiary, compliance issues, tax obligations, immigration regulations, and securing office space and employee accommodations. These factors are less of a concern in joint ventures, strategic alliances, or franchising when seeking to enter international markets.

8 0

3 months ago