McDaniel Condominiums, Inc. of Panama City, FL,

McDaniel Condominiums, Inc. of Panama City, FL, recently purchased land near the Gulf of Mexico and is
attempting to determine the size of the condominium development it should build. It is considering
three sizes of development: Small, d1; Medium, d2; and Large, d3. At the same time, an uncertain
economy makes ascertaining the demand for the new condominiums difficult. McDaniel’s management
realizes that a large development followed by weak demand could be very costly to the company.
However, if McDaniel makes a conservative small-development decision and then finds a strong demand,
the firm’s profit will be lower than it might have been. With three levels of demand—low, medium, and
high—McDaniel’s management has prepared the following profit (in thousands of dollars) payoff table.
STATES OF NATURE
Decision
Alternatives
Small, d1
Medium, d2
Large, d3 Weak Moderate Strong
Deman
Demand Demand
d
400
400
400
100
600
600
-300
300
900 a. If nothing is known about the demand probabilities, what is the recommended decision
alternative using Optimistic, Conservative, and Minimax Regret approaches?
b. Suppose the Pr(Weak) = 0.20, Pr(Moderate) = 0.35, and Pr(Strong) = 0.45. Draw a Decision Tree &
solve it. What is the recommended decision alternative?
c. What is the expected value of the perfect information (EVPI)? McDaniel Condominium is considering a 6-month Market Research Survey to learn more about the
potential market acceptance of the condominium project. Management anticipates that the market
research study will provide either a Favorable or Unfavorable report. Conditional probabilities are
shown below.
Market Research Report
State of Nature
Weak
Moderate
Strong Favorable Unfavorable
0.60
0.40
0.50
0.50
0.80
0.20 d. Calculate the Joint and Posterior Probabilities for each State of Nature.
e. Do some research and give at least two real world examples of companies who use decision
analysis/theory. Write a paragraph explaining how these companies benefit by using such techniques.