TUTORIAL

BSc (Hons) Construction Management

Construction Systems and Analysis (BCM524)
Answer all of the questions.
1. Fauziah & Co. Is going to introduce one of the three new product: Fauziah Weatherbond, Fauziah
Sheer Finish or Fauziah Clean Matte paint. As the market conditions (favourable, stable or
unfavourable) affect the payoffs of the products, the company estimates the following payoffs:
Table 1
Market Condition
Product
Favourable

Stable

Unfavourable

Weatherbond

18 000

9 000

- 5 000

Sheer Finish

12 000

7 000

2 000

Clean Matte

11 000

10 000

-6 000

a)
b)
c)
d)
e)

Maximax
Maximin
Hurwicz with k =0.7
Laplace
Minimax Regret

2. Gapurna Company is considering several alternative development projects. The financial success
of these projects depends on the interest rates movements in the next four years. The projects and
their three-year financial returns (in Millions) with the possible given interest rates decline, remain
stable or increase are shown in the table below.
Table 2
Interest Rate
Decline
Stable
Shops
36
22
Mall
53
39
Condominium
35
17
Warehouse
16
15
Determine the investment using the following decision criteria :
a) Maximax
b) Maximin
c) Hurwicz with k =0.8
d) Laplace
e) Minimax Regret
Project

Increase
15
25
4
10

3. The payoff table below indicates the returns (in RM thousands) of an investment.
Table 3
Type of
Economic Situation
investment
Good
Stable
Poor
Stock
150
60
-30
Bond
50
40
36
Fixed Deposit
45
45
45
Determine the best course of action using:
a)
b)
c)
d)
e)

Maximax
Maximin
Hurwicz criterion with k=0.8
Laplaces equally likely criterion
Minimax regret criterion

4. Fauziah & Co. Is going to introduce one of the three new product: Fauziah Weatherbond, Fauziah
Sheer Finish or Fauziah Clean Matte paint. As the market conditions (favourable, stable or
unfavourable) affect the payoffs of the products, the company estimates the following payoffs:
Table 4
Market Condition

Product
Favourable

Stable

Unfavourable

Weatherbond

18 000

9 000

- 5 000

Sheer Finish

12 000

7 000

2 000

Clean Matte

11 000

10 000

-6 000

0.3

0.5

0.2

Not introducing
Probability

a) What is the decision under risk using the EMV method

b) Shafie Market Research Co approached Fauziah & Co to help in decision making. Shafie is able
to tell Fauziah with certainty whether the market is favourable, stable or unfavourable by market
technical analysis. This will prevent Fauziah & Co from making an expensive mistake by
choosing the wrong product. Thus the maximum amount of money that Fauziah is willing to pay
for the market research (EVPI).
Find the amount of money Fauziah & Co is willing to splurge.
c) Using minimizing expected opportunity loss method, determine which product Fauziah & Co
should produce.
5. Salma Electro specializes in manufacturing electronic components. It is considering building a new
facility either large, medium, or small, to produce the components. The following table shows the
payoffs (in RM Thousands) for a proposed facility under three market conditions (strong, fair, and
poor markets)
Table 5
Market Condition

Product
Favourable

Stable

Unfavourable

Large Facility

85

60

25

Medium Facility

60

50

45

Small Facility

40

40

35

Probability

0.3

0.6

0.1

a) What decision would maximize the expected payoff

b) Construct an opportunity loss table and determine the best decision by minimizing expected
opportunity loss
c) Determine the expected value with perfect information (EVWPI) and expected value of
perfect information (EVPI)
6. You are trying to determine what stock to invest in. The wisdom of your decision depends on the
state KLSE in one year. There are three possible states of nature; the market could go down, stay
about the same, or it would go up. You have narrowed your investment choices to four stocks. The
payoffs for the various combinations of investment choices and market conditions are shown in the
following table.
Table 6
State of Nature
Alternative
Market is Up
Market is unchanged
Market is Down
Stock A
20,000
5,000
-15,000
Stock B
10,000
8,000
0
Stock C
100,000
0
-50,000
Stock D
15,000
5,000
-10,000
What are the correct investment choices given in the following decision- making criteria?
a) Laplace
b) Maximin
c) Hurwicz k=0.4
d) Minimax Regret
7. A farmer is undecided whether to plant yam or tapioca. If he plants yam and the weather is wet, he
earns RM 8000 and if it is dry, he earns RM 5000. On the other hand, if he plant tapioca and the
weather is wet, he earns RM7000 and if it is dry, he earns RM6500. In the past, he realizes that
30% of the previous years have been wet and 70% have been dry.
Before planting, the farmer considers hiring an expert in weather forecast at the cost of RM500.
There is a 40% chance that the expert will predict a wet year ahead but if the forecast is wet
weather, there is a 90% chance that the weather will be wet while if the forecast is dry weather,
there is a 70% chance that the weather will be dry.
a) Construct a decision tree for the above situation.
b) Advise the farmer for the best decision.
8. A company is deciding whether to develop and launch a new product. Research and development
costs are expected to be $400,000 and there is a 70% chance that the product launch will be
successful, and a 30% chance that it will fail. If it is successful, the levels of expected profits and the
probability of each occurring have been estimated as follows, depending on whether the products
popularity is high, medium or low:
Table 7
Probability Profits
High
0.2
$500,000 per annum for two years
Medium
0.5
$400,000 per annum for two years
Low
0.3
$300,000 per annum for two years
If it is a failure, there is a 0.6 probability that the research and development work can be sold for
$50,000 and a 0.4 probability that it will be worth nothing at all.

9. En. Hashim is not sure what he should do. He can either build a quadplex (that is, a building with
four apartments), a duplex, gather additional information, or simply do nothing. If he gathers
additional information, the results could be either favorable or unfavorable, but it would cost him RM
3,000 to gather the information. En Hashim believes that there is a 50-50 chance that the
information will be favorable. If the rental market is favorable he will earn RM 15,000 with the
quadplex or RM 5,000 with the duplex. En. Hashim doesn't have the financial resources to do both.
With an unfavorable rental market, however, he could lose RM 20,000 with the quadplex or RM
10,000 with the duplex.
Without gathering additional information En. Hashim estimates that the probability of a favorable
rental market is 0.7. A favorable report from the study would increase the probability of a favorable
rental market to 0.9. Furthermore, an unfavorable report from the additional information would
decrease the probability of a favorable rental market to 0.4. Of course, En. Hashim could forget all
of these numbers and do nothing.
Use decision tree method to advice En. Hashim.
10. Mr. Ismail, the Fund Manager of the CIMB investment, must decide on investment of theirs fund. He
can choose strategy A, strategy B or not to invest. The profit (RM) from each alternative depends on
the economic conditions as given in the following table:
Table 8
Alternative
Economic Condition
Good condition
Poor Condition
Strategy A
365 000
35 000
Strategy B
450 000
-60 000
No to invest
0
0
Mr. Ismail estimates the probability of a good economy without performing a survey is 0.5. As he is
still uncomfortable with his personal assessment, he would like to hire an economist to survey the
future economic condition. This will cost RM20 000. Furthermore, the probability of a positive result
from market survey is 0.6 and there is a 70% chance that the economy will be good given a positive
survey result. However, if the survey result is negative, the chance of a good economy will be
reduced 30%.
Draw a tree diagram to illustrate the problem. Calculate all the expected monetary values and make
a recommendation to Mr. Ismail.
11. A group of school teachers is considering the construction of a tuition centre. If the demand is high,
the teachers could realize a net profit of RM80,000. If the market is not favourable, they could lose
RM30,000. Of course, they do not have to proceed at all, in which case there is no cost. In the
absence of any market data, the best the teachers can guess is that there is a 60% chance the
tuition centre will be successful.
The teachers were approached by a market research firm that offers to perform a study of the
market at a fee of RM1000. The market researchers claim their experience enables them to make
the following statements of probability as stated in Table 1.
Table 9
Probability of a favourable market given a favourable study
0.82
Probability of an unfavourable market given a favourable study

0.18

Probability of a favourable market given an unfavourable study

0.11

Probability of an unfavourable market given an unfavourable study

0.89

Probability of a favourable research study

0.55

Probability of an unfavourable research study

0.45

a) Develop a new decision tree for the teachers to reflect the options with the market study.
b) Determine the expected value of sample information and the maximum amount the
teachers are willing to pay for a market study.
12. A building contractor is submitting a bid for a construction project. The project would cost him
RM400,000 and he must decide on how much to bid. He is considering bids at RM500,000,
RM525,000, RM550,000 and RM575,000 and thinks that with the lowest bid he stands 0.4 chance
of getting the project. The other bids have chances of 0.35, 0.25 and 0.10 respectively of being
successful. No cost is involved in submitting an unsuccessful bid.
Construct a decision tree for this problem, and find the optimal bid and optimal expected profit.

13. Siti Saerah has enjoyed sailing small boats since she was 7 years old, when her mother started
sailing with her. Today, Siti is considering the possibility of starting a company to produce small
sailboats for the recreational market. Unlike other mass produced sailboats, however, these boats
will be made specifically for children between the ages of 10 and 15. The boats will be of the highest
quality, and extremely stable, and the sail size will be reduced to prevent problems of capsizing.
Because of the expense involved in developing the initial moulds and acquiring the necessary
equipment to produce fibreglass sailboats for young children, Siti has decided to conduct a pilot
study to make sure that the market for the sailboats will be adequate. She estimates that the pilot
study will cost her RM10,000. Furthermore, the pilot study can be either successful or not
successful. Her basic decisions are to build a large manufacturing facility, a small manufacturing
facility, or no facility at all. With a favourable market, Siti can expect to make RM 90,000 from the
large facility or RM 60,000 from the smaller facility. If the market is unfavourable, however, Siti
estimates that she would lose RM 30,000 with a large facility, while she would lose only RM 20,000
with the small facility. Siti estimates that the probability of a favourable market given a successful
pilot study is 0.8. The probability of an unfavourable market given an unsuccessful pilot study is
estimated to be 0.9. Siti feels that there is a 50-50 chance that the pilot study will be successful. Of
course, Siti could bypass the pilot study and simply make the decision as to whether to build a large
plant, small plant or no facility at all. Without doing any testing in a pilot study, she estimates that
the probability of a successful market is 0.6.
Give recommendation on the best decision Siti Saerah should take by conducting a decision tree.

GOOD LUCK!!