CAC 311 Assignment 5

03 Mar

CAC 311 Assignment 5
1. Rambo Enterprises is attempting to minimize the taxes it pays to the central government.  Part of this effort requires a decision whether or not to expand its production facilities.  The impact of the total taxes depends in part on whether the government passes a new tax bill that is currently before the national assembly.  If the bill passes, taxes will rise from 5% of sales revenues to 10% of sales revenue. Rambo’s financial and economic analysts estimate that if the firm expands, revenues will be Sh 10,000,000. If they do not expand, revenues will be sh 7,000,000.
a. Prepare a payoff table for this decision. b. Recommend to management of Rambo the best decision to be made assuming; – optimistic aggressive strategy – Pessimistic conservative strategy – Bayes-Laplace strategy – Opportunity loss strategy c. If political analysts estimate the probability that the tax law is passed at 70 percent.  Should Rambo expand? d. What is the maximum should Rambo be willing to pay in the acquisition of additional expert information about this decision given the analysts’ probability?
2. The CEO of Tropics Manufacturing Company has Sh 1,000,000 available to invest.  The CEO would like to either expand production, invest in stocks, or purchase a certificate of deposit from the bank.  The unknown is whether the economy will continue at high level or there will be a recession.  He estimates the likelihood of a recession at 0.20.  Whether there is a recession or not, the certificate of deposit will result in a gain of 6 percent.  If there is a recession, he predicts 10 percent loss if he expands his production and a 5 percent loss if he invests in stocks.  If there is not a recession, an expansion of production will result in a 15 percent gain, and stock investment will produce a 12 percent gain.
Required: (a) Prepare a payoff table for the CEO’s decision situation. (b) Determine the value of expected value of perfect information. Interpret this value.

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Posted by on March 3, 2017 in Academic Writing


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