Question

Answer questions 7 to 9 using the following data The Southern Textile Company is contemplating the future of one of its plants located in South Carolina. Three alternative decisions are being considered: (1) Expand the plant and produce lightweight, durable materials for possible sales to the military, a market with little foreign competition: (2) maintain the status quo at the plant, continuing production of textile soods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first two alternatives is chosen, the plant will still be sold at the end of the year. The amount of profit that could be earned by selling the plant in a year depends on foreign market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this decision situation. (hint calculate optimistic, pessimistic, and regret choices) States of Nature Decision Good Foreign Competitive Conditions S800.000 00.000 300 000 Poor Foreign Competive Conditione $500.000 - 150.000 Expand Marthago 4) Which alternative is best: a. An optimistic manager will go for maintain status quo b. A pessimistic manager will go for maintain status quo c. A manager who wants to minimize the maximum regret will go for sell now d. None of the above. 5) Maximum regret for expand: a S650,000 b. S350,000 C. 0 d. $500,000 6) Which alternative is best: a. If expand is chosen with a view to minimize the maximum regret, then the maximum regret for expand is $500.000 b. If status quo is chosen with a view to minimize the maximum regret, then the maximum regret for status quo is $650,000 C. I sell now is chosen with a view to minimize the maximum regret, then the maximum regret for sell now is $980,000 d. If sell now is chosen with a view to minimize the maximum regret, then the maximum regret for sell now is $180,000

Answer 1

4) An optimistic manager will go for maintain status quo. Good market conditions will give a 1300000 payoff. Answer is a.

5) Maximum regret for expand = 1300000 - 800000 = 500000. Answer is d.

6) Practically, companies wait for good foreign competitive conditions to sell the plant. So if companies can wait for a longer period than one year till such time the poor conditions become good, then maintaining status quo makes sense. Other wise one takes an optimistic stand and go for expansion where the company can benefit in both conditions. In such cases where sale has to happen in one year, answer should be a) as under expansion, the company stands to gain in a short span of one year.