MIS 344 Homework #1 Complete Solution
MIS 344 Homework#1
The Jamis Corporation is involved with waste management. During the past 10 years it has become one of the largest waste disposal companies in the Midwest, serving primarily Wisconsin, Illinois, and Michigan. Bob Jamis, president of the company, is considering the possibility of establishing a waste treatment plant in Mississippi. From past experience, Bob believes that a small plant in northern Mississippi would yield a $500,000 profit regardless of the market for the facility. The success of a medium-sized waste treatment plant would depend on the market. With a low demand for waste treatment, Bob expects a $200,000 return. A medium demand would yield a $700,000 return in Bob's estimation, and a high demand would return $800,000. Although a large facility is much riskier, the potential return is much greater. With a high demand for waste treatment in Mississippi, the large facility should return a million dollars.
With a medium demand, the large facility will return only $400,000. Bob estimates that the large facility would be a big loser if there were a low demand for waste treatment. He estimates that he would lose approximately $200,000 with a large treatment facility if demand were indeed low. Looking at the economic conditions for the upper part of the state of Mississippi and using his experience in the field Bob estimates that the probability of a low demand for treatment plants is 0.15. The probability for a medium-demand facility is approximately 0.40, and the probability of a high demand for a waste treatment facility is 0.45. Because of the large potential investment and the possibility of a loss, Bob has decided to hire a market research team that is based in Jackson, Mississippi. This team will perform a survey to get a better feeling for the probability of a low, medium, or high demand for a waste treatment facility. The cost of the survey is $50,000. To help Bob determine whether to go ahead with the survey, the marketing research firm has provided Bob with the following information:
As you see, the survey could result in three possible outcomes. Low survey results mean that a low demand is likely. In a similar fashion, medium survey results or high survey results would mean a medium or a high demand, respectively. What should Bob do?