MATH C

(Decision Making)











Submitted to:
Ms. Ritzel Montalban



Submitted by:
Cabaluna, Nathallie H.
Casipong, Denmark
Maglinte, Liezel Gail F.
Montes, Jane Belle T.
Singson, Kris Anne A.


PROBLEM 1:

ABC Company, upon the end of the fiscal year, needs to generate cash out of
their receivables in order to extinguish their current liabilities. They are planning
to finance their receivables using any of the following methods: Assignment,
Pledging, and Factoring.
=70%

Alternatives
Future Interest Level
Low Moderate High
20% 40% 40%
Assignment 1,000 1,650 2,000
Factoring 790 1,320 3,700
Pledging 1,500 1,600 3,000

1. Decision Making Under the Condition of Certainty

If the company is certain that the condition of the economy is LOW, the
best decision is to finance its receivables using pledging.
If the companys economic condition is MODERATE, the best decision is
to finance its receivables using assignment of receivables.
If the companys economic condition is HIGH, the best decision is to
finance its decision using factoring of receivables.

2. Decision Making Under the Condition of Uncertainty
a. Maximax Strategy
Alternatives Maximum
Assignment 2,000
Factoring 3,700
Pledging 3,000

b. Maximin Strategy





Alternatives Minimum
Assignment 1,000
Factoring 790
Pledging 1,500
Since the maximum among the maximum
values refer to the alternative of factoring,
ABC Companys best decision is to use
factoring in financing its receivables.
Since the maximum among the minimum
values of each alternative refers to
pledging, ABC Company, therefore, will
use pledging to finance its receivables.
c. Laplace Strategy
Alternatives
Row
Total
Row
Average
Assignment 4,650 1,550
Factoring 5,810 1,936.67
Pledging 6,100 2,033.33

d. Hurwicz Strategy

Assignment: (0.70) (2,000) + (0.30) (1,000) = 1,700
Factoring: (0.70) (3,700) + (0.30) (790) = 2,827
Pledging: (0.70) (3,000) + (0.30) (1,500) = 2,550


e. Minimax Regret Strategy
Alternatives
Future Interest Level
Maximum
Low Moderate High Regret
Assignment 500 0 1,700 1,700
Factoring 710 330 0
710
Pledging 0 50 700 700


3. Decision Making Under Condition of Risk

Assignment: (1,000) (0.20) + (1,650) (0.40) + (2,000) (0.40) = 1,660
Factoring: (790) (0.20) + (1,320) (0.40) + (3,700) (0.40) = 2,166
Pledging: (1,500) (0.20) + (1,600) (0.40) + (3,000) (0.40) = 2,140


The Expected Value of Perfect Information (EVPI)
Method 1:
EV
under certainty
= (1,500) (0.20) + (1,650) (0.40) + (3,700) (0.40) = 2,440
EVPI = 2,440 2,166 = 274


The maximum average refers to the third
alternative, which is to use pledging in
financing its receivables.
Decision: The best alternative is to factor the receivables.
Decision: The best alternative is the pledging of receivables.
Decision: The best decision, based on the alternative with the highest
expected value, is to factor the receivables.
Method 2:






Assignment: (500) (0.20) + (0) (0.40) + (1,700) (0.40) = 780
Factoring: (710) (0.20) + (330) (0.40) + (0) (0.40) = 274
Pledging: (0) (0.20) + (50) (0.40) + (700) (0.40) = 300



PROBLEM 2:

Mr. Montesclaros, owner of a house fronting one of the famous beaches in
Basdiot, Moalboal, is going to settle in Brussels, Belgium for good. He is
undecided on what he will do with his house. Mr. Montesclaros is choosing
among alternatives wherein he could gain profit.
=75%






1. Decision Making Under the Condition of Certainty

If the company is certain that the condition of the economy is LOW, the
best decision is to rent the rest house to tourists.
If the companys economic condition is MODERATE, the best decision is
to rent the house to tourists.
If the companys economic condition is HIGH, the best decision is to
convert his home into a beach house.



Alternatives
Future Interest Level
Maximum
Low Moderate High Regret
20% 40% 40%
Assignment 500 0 1,700 1,700
Factoring 710 330 0
710
Pledging 0 50 700 700
Alternatives
Future Income Level
Low Moderate High
25% 35% 40%
Sell the house 1,000 1,875 2,425
Convert into a beach house 1,650 3,110 3,850
Rent the house to tourists 2,500 3,200 3,500
Decision: According to methods one and two of computing for the
expected value of perfect information, the best decision is to factor the
receivables.
2. Decision Making Under the Condition of Uncertainty
a. Maximax Strategy
Alternatives Maximum
Sell the house 2,425
Convert into a beach house 3,850
Rent the house to tourists 3,500

b. Minimum Strategy

Alternatives Minimum
Sell the house 1,000
Convert into a beach house 1,650
Rent the house to tourists 2,500

c. Laplace Strategy

Alternatives
Row
Total
Row
Average
Sell the house
5,300

1,766.67
Convert into a beach house
8,610

2,870.00
Rent the house to tourists
9,200

3,066.67

d. Hurwicz Strategy

Sell the house = (2,425) (0.75) + (1,000) (0.25) = 2,068.75
Convert into a beach house = (3,850) (0.75) + (1,650) (0.25) = 3,300
Rent the house to tourists = (3,500) (0.75) + (2,500) (0.25) = 3,250

Decision: The best alternative is to convert the home into a beach house.

e. Minimax Regret Strategy
Alternatives
Future Income Level
Maximum
Low Moderate High Regret
Sell the house 1,500 1,325 1,425
1,500
Convert into a beach
house
850 90 0 850
Rent the house to tourists 0 0 350 350

Decision: The best alternative with the least regret is to rent the house to
the tourists.


Since the maximum among the maximum
values refer to the second alternative, Mr.
Montesclaros best decision is to convert
his home into a beach house.
Since the maximum among the minimum
values refer to the last alternative, Mr.
Montesclaros best decision is to rent his
house to tourists on vacation.
The maximum average refers
to the third alternative, which
is to rent the house to the
tourists.
3. Decision Making Under the Condition of Risk

Sell the house: (1,000) (0.25) + (1,875) (0.35) + (2,425) (0.40) = 1,876.25
Convert the house: (1,650) (0.25) + (3,110) (0.35) + (3,850) (0.40) = 3,041
Rent to tourists: (2,500) (0.25) + (3,200) (0.35) + (3,500) (0.40) = 3,145





The Expected Value of Perfect Information (EVPI)

Method 1:

EV
under certainty
= (2,500) (0.25) + (3,200) (0.35) + (3,850) (0.40) = 3,285
EVPI = 3,285 3,145 = 140
Method 2:
Alternatives
Future Income Level
Maximum
Low Moderate High Regret
25% 35% 40%

Sell the house 1,500 1,325 1,425
1,500
Convert into a beach
house
850 90 0 850
Rent the house to tourists 0 0 350 350

Sell the house: (1,500) (0.25) + (1,325) (0.35) + (1,425) (0.40) = 1,408.75
Convert the house: (850) (0.25) + (90) (0.35) + (0) (0.40) = 244
Rent to tourists: (0) (0.25) + (0) (0.35) + (350) (0.40) = 140



Decision: The best decision, based on the alternative with the highest
expected value, is to rent Mr. Montesclaros home to the tourists.
Decision: According to methods one and two of computing for the
expected value of perfect information, the best decision is to rent Mr.
Montesclaros house to the tourists.