The Major Motors Corporation is trying to decide whether to introduce a new midsize car. The directors of the company only want to produce the car if it has at least an 80% chance of generating a positive net present value over the next 10 years. If the company decides to produce the car, it will have to pay an uncertain initial start-up cost that is estimated to follow a triangular distribution with a minimum value of $2 billion, a maximum value of $2.4 billion, and a most likely value of $2.1 billion. In the first year, the company would produce 100,000 units. Demand during the first year is uncertain but expected to be normally distributed with a mean of 95,000 and standard deviation of 7,000. For any year in which the demand exceeds production, production will be increased by 5% in the following year. For any year in which the production exceeds demand, production will be decreased by 5% in the next year, and the excess cars will be sold to a rental car company at a 20% discount. After the first year, the demand in any year will be modeled as a normally distributed random variable with a meanequal to the actual demand in the previous year and standard deviation of 7,000. In the first year, the sales price of the car will be $13,000 and the total variable cost per car is expected to be $9,500. Both the selling price and variable cost are expected to increase each year at the rate of inflation, which is assumed to be uniformly distributed between 2% and 7%. The company uses a discount rate of 9% to discount future cash flows. a. Create a spreadsheet model for this problem. What is the minimum, average, andmaximum NPV Major Motors can expect if they decide to produce this car? (Hint: Consider using the NPV( ) function to discount the profits Major Motors would earn each year.) b. What is the probability of Major Motors earning a positive NPV over the next 10 years? c. Should they produce this car?
> The Foxridge Investment Group buys and sells rental income properties in Southwest Virginia. Bill Hunter, president of Foxridge, has asked for your assistance in analyzing a small apartment building the group is interested in purchasing.The property in q
> Bob Farrell, owner of Farrell Motors, is trying to decide whether to buy an insurance policy to cover hail damage on his inventory of more than 200 cars and trucks. Thunderstorms occur frequently and they sometimes produce hail the size of golf balls tha
> A car dealer is offering the following three 2-year leasing options: Assume a customer expects to drive between 15,000 and 35,000 miles during the next 2 years according to the following probability distribution: a. Construct a payoff matrix for this p
> The Fish House (TFH) in Norfolk, Virginia, sells fresh fish and seafood. TFH receives daily shipments of farm-raised trout from a nearby supplier. Each trout costs $2.45 and is sold for $3.95. To maintain its reputation for freshness, at the end of the d
> Lori Henderson runs a specialty ski clothing shop outside of Boone, North Carolina. She must place her order for ski parkas well in advance of ski season because the manufacturer produces them in the summer months. Lori needs to determine whether to plac
> One of Philip Mahn’s investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Philip is considering two new investments: a stock mutualfund and a one-year certificate of deposit (CD). The CD is guaranteed to pay an
> Identify a consumer electronics product that you want to purchase (e.g., a TV, digital camera, tablet computer, and so on). Identify at least three models of this product that you would consider purchasing. Identify at least three criteria on which these
> Kathy Jones is planning to buy a new minivan but, after narrowing her choices down to three models (X, Y, and Z) within her price range, she is having difficulty deciding which one to buy. Kathy has compared each model against the others on the basis of
> The president of Pegasus Corporation is trying to decide which of the three candidates (denoted as candidates A, B, and C) to hire as the firm’s new vice president of marketing. The primary criteria the president is considering are each
> Hiro Tanaka is going to purchase a new car and has narrowed the decision down to three different sedans. The following table summarizes how he rates each sedan on the criteria that are most important to him. Upon reflection, Hiro decides that the weight
> Consider the following payoff matrix: Should a decision maker ever select decision alternative C? Explain your answer.
> Marissa Jones is the president and CEO of Sound’s Alive, a company that manufactures and sells a line of speakers, CD players, receivers, high-definition televisions, and other items geared for the home entertainment market. Respected throughout the indu
> Rusty Reiker is looking for a location to build a new restaurant. He has narrowed the options down to three possible locations. The following table summarizes how he rates each location on the criteria that are most important to his business. Upon refle
> Suppose that you are given the following two alternatives: a. At what value of p would you be indifferent between these two alternatives? b. Given your response to part (a), would you be classified as risk averse, risk neutral, or risk seeking? c. Suppo
> Thom DeBusk, an architect, is considering buying, restoring, and reselling a home in the Draper-Preston historic district of Blacksburg, VA. The cost of the home is $240,000 and Thom believes it can be sold for $450,000 after being restored. Thom expects
> Eagle Credit Union (ECU) has experienced a 10% default rate with its commercial loan customers (i.e., 90% of commercial loan customers pay back their loans). ECU has developed a statistical test to assist in predicting which commercial loan customers wil
> Johnstone & Johnstone (J&J) has developed a new type of hand lotion with a distinctive fragrance. Before distributing it nationally, J&J will test market the new product. The joint probability of a successful test market and high sales upon national dist
> The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of these rights is $90,000. If there is natural oil at the site, it is estimated to be worth $800,000; however, the compa
> From industry statistics, a credit card company knows that 0.8 of its potential cardholders are good credit risks and 0.2 are bad credit risks. The company uses discriminate analysis to screen credit card applicants and determine which ones should receiv
> Refer to the previous question. The present value (PV) of a future cash-flow value (FV) is defined as: where n is the number of years into the future in which the cash flow occurs and r is the discount rate. Suppose that the discount rate for Banisco is
> The Banis co Corporation is negotiating a contract to borrow $300,000 to be repaid in a lump sum at the end of 9 years. Interest payments will be made on the loan at the end of each year. The company is considering the following three financing arrangeme
> Bulloch County has never allowed liquor to be sold in restaurants. However, in 3 months, county residents are scheduled to vote on a referendum to allow liquor to be sold by the drink. Currently, polls indicate there is a 60% chance that the referendum w
> Throughout our discussion of regression analysis, we used the Regression command to obtain the parameter estimates that minimize the sum of squared estimation errors. Suppose that we want to obtain parameter estimates that minimize the sum of the absolut
> US Express is an overnight package delivery company based in Atlanta, Georgia. Jet fuel is one of the largest operating costs incurred by the company, and the company wants your assistance in managing this cost. The price of jet fuel varies considerably
> Give an example of a national business, political, or military leader who made a good decision that resulted in a bad outcome, or a bad decision that resulted in a good outcome.
> Southern Gas Company (SGC) is preparing to make a bid for oil and gas leasing right in a newly opened drilling area in the Gulf of Mexico. SGC is trying to decide whether to placea high bid of $16 million or a low bid of $7 million. SGC expects to be bid
> Refer to the previous question. A manufacturing engineer for MPI collected the following data on the failure rates of components X, Y, and Z in a random sample of 1,000 circuit boards: For example, the first row in this table indicates that components X
> Microproducts, Incorporated (MPI) manufactures printed circuit boards for a major PC manufacturer. Before a board is sent to the customer, three key components must be tested. These components can be tested in any order. If any of the components fail, th
> Bill and Ted are going to the beach with hopes of having an excellent adventure. Before going, they read a report by the world’s leading authority on tiger shark behavior indicating that when a tiger shark is in the vicinity of swimmers at the beach, the
> A manufacturer has two machines that make the same parts for diesel truck engines. One machine is 5 years older than the other one. The older machine runs slower and makes 35% of the parts, of which 85% are of acceptable quality and don’t require rework.
> Medical studies have shown that 10 out of 100 adults have heart disease. When a person with heart disease is given an EKG test, a 0.9 probability exists that the test will indicate the presence of heart disease. When a person without heart disease is giv
> The Tall Oaks Wood Products Company is considering purchasing timberland for $5 million that would provide a future source of timber supply for the company’s operations over the next 10 years. Alternatively, for $5 million, the company could also buy tim
> Refer to question 10. Suppose that the consultant’s fee is $5,000 and the utility function for the owner of Morley Properties can be approximated by the exponential utility function: where the risk tolerance value R 5 100 (in $1,000s)
> Refer to question 9. Suppose that the utility function for the owner of Morley Properties can be approximated by the exponential utility function: where the risk tolerance value R 5 100 (in $1,000s). a. Convert the payoff matrix to utility values. b. W
> Benjamin Franklin once said, “In this world nothing is certain but death and taxes.” Although that may be true, there is often great uncertainty involved in when one will encounter death and how much one must pay in ta
> Refer to the previous question. Morley Properties can hire a consultant to predict the most likely level of demand for this project. This consultant has done many similar studies and has provided Morley Properties with the following joint probability tab
> This chapter presented the problem of having to decide between two job offers. The decision maker could accept the job with company A, accept the job with company B, or reject both offers and hope for a better one. What other alternatives can you think o
> Refer to questions 6 and 7 and answer the following questions: a. What is the probability that the drive-in window is empty? b. What is the probability that a customer must wait for service? c. On average, how many cars wait for service? d. On average, w
> Suppose that arrivals to a queuing system with one server follow a Poisson distribution with an average of l 5 5 per time period, and that service times follow an exponential distribution with an average service rate of m 5 6 per time period. a. Compute
> Refer to the previous question. Suppose that Road Rambler’s phone system can only keep 4 calls on hold at any time, the average profit margin of each call is $55, and sales reps cost the company $12 per hour. a. If callers who receive a busy signal tak
> Calls to the service center at AutoMax occur at a rate of 27 per hour and follow a Poisson distribution. A single operator answers the calls and can handle an average 25 calls per hour with service times following an exponential distribution. If a call a
> Suppose a product must go through an assembly line is made up of five sequential operations. The time it takes to complete each operation is normally distributed with a mean of 180 seconds and standard deviation of 5 seconds. Define the flow time to be t
> Suppose a product must go through an assembly line is made up of five sequential operations. The time it takes to complete each operation is normally distributed with a mean of 180 seconds and standard deviation of 5 seconds. Let X denote the cycle time
> Firebird Packaging Operations manufactures small plastic cups used in a popular single-cup brewing systems for coffee, tea, and hot chocolate. The cups are thermoformed with several different plastic resins including High Impact Polystyrene (HIPS). Fireb
> Meredith Shomers manages scholarship endowments for a major public university. Presently, she is trying to determine how much scholarship money may be awarded from an endowment with a current balance of $538,000. The endowment’s funds are invested in a p
> Refer to the previous question. Suppose plants 1 and 2 represent different building alternatives for the same site (i.e., only one of these plants can be built). Similarly, suppose plants 4 and 5 represent different building alternatives for another site
> A debate recently erupted about the optimal strategy for playing a game on the TV show called “Let’s Make a Deal.” In one of the games on this show, the contestant would be giventhe choice of prizes behind three closed doors. A valuable prize was behind
> One of the examples in this chapter dealt with determining the optimal reorder point for a computer monitor sold by Millennium Computer Corp. Suppose that it costs MCC $0.30 per day in holding costs for each monitor in beginning inventory, and it costs $
> Each year, the Schriber Corporation must determine how much to contribute to the company’s pension plan. The company uses a 10-year planning horizon to determine the contribution which, if made annually in each of the next 10 years, would allow for only
> Michael Abrams runs a specialty clothing store that sells collegiate sports apparel. One of his primary business opportunities involves selling custom screen-printed sweatshirts for college football bowl games. He is trying to determine how many sweatshi
> Amanda Green is interested in investing in the following set of mutual funds whose returns are all normally distributed with the indicated means and standard deviations: a. What is the expected return and standard deviation on a portfolio where Amanda i
> Refer to the previous question. Another type of option is the Asian option. Its payoff is not based on the price of the stock on the expiration date but, instead, on the average price of the stock over the lifetime of the option.Suppose a stock has an in
> A European call option gives a person the right to buy a particular stock at a given price (the strike price) on a specific date in the future (the expiration date). This type of call option is typically sold at the net present value of the expected valu
> Calls to the 24-hour customer support line for Richman Financial Services occur randomly following a Poisson distribution with the following average rates during different hours of the day: The Richman’s customer service representative
> Dr. Sarah Benson is an ophthalmologist who, in addition to prescribing glasses and contact lenses, performs optical laser surgery to correct nearsightedness. This surgery is fairly easy and inexpensive to perform. Thus, it represents a potential gold min
> For investment advisors, a major consideration in planning for a client in retirement is the determination of a withdrawal amount that will provide the client with the funds necessary to maintain his or her desired standard of living throughout the clien
> The owner of a local car dealership has just received a call from a regional distributor stating that a $5,000 bonus will be awarded if the owner’s dealership sells at least 10 new cars next Saturday. On an average Saturday, this dealership has 75 potent
> Executives at Meds-R-Us have decided to build a new production facility for the company’s bestselling high blood pressure drug. The problem they now face is determining the size of the facility (in terms of production capacity). Last year, the company so
> Refer to the Hungry Dawg Restaurant example presented in this chapter. Health claim costs actually tend to be seasonal, with higher levels of claims occurring during the summer months (when kids are out of school and more likely to injure themselves) and
> Vinton Auto Insurance is trying to decide how much money to keep in liquid assets to cover insurance claims. In the past, the company held some of the premiums it received ini interestbearing checking accounts and put the rest into investments that are n
> Bob Davidson owns a newsstand outside the Waterston office building complex in Atlanta, near Hartsfield International Airport. He buys his papers wholesale at $0.50 per paper and sells them for $0.75. Bob wonders what is the optimal number of papers to o
> Podcessories manufacture several accessories for a popular digital music player. The company is trying to decide whether to discontinue one of the items in this product line. Discontinuing the item would save the company $600,000 in fixed costs (comprise
> Sammy Slick works for a company that allows him to contribute up to 10% of his earnings into a tax-deferred savings plan. The company matches a portion of the contributions its employees make based on the organization’s financial performance. Although th
> Road Racer Sports, Inc. is a mail-order business dedicated to the running enthusiast. The company sends out full-color catalogs several times a year to several hundred thousand people on its mailing list. Production and mailing costs are fairly expensive
> After spending 10 years as an assistant manager for a large restaurant chain, Ray Clark has decided to become his own boss. The owner of a local submarine sandwich store wants to sell the store to Ray for $65,000 to be paid in installments of $13,000 in
> Techs burg, Inc. uses a stamping machine to manufacture aluminum bodies for lightweight, miniature aircraft used for military reconnaissance. Currently, forms in the stamping machine are changed after every 65 hours of operation or whenever a form breaks
> Fiasco Foods, Inc. is one of the largest suppliers of institutional and commercial food products in the United States. Fortunately for Fiasco, the demand for “food away from home” has been growing steadily over the pas
> Representatives from the American Heart Association are planning to go door-to-door throughout a community, soliciting contributions. From past experience, they know that when someone answers the door, 80% of the time it is a female and 20% of the time i
> Acme Equipment Company is considering the development of a new machine that would be marketed to tire manufacturers. Research and development costs for the project are expected to be about $4 million but could vary between $3 and $6 million. The market l
> Employees of Georgia-Atlantic are permitted to contribute a portion of their earnings (in increments of $500) to a flexible spending account from which they can pay medical expenses not covered by the company’s health insurance program. Contributions to
> The graph of the probability distribution of a normally distributed random variable with a mean of 20 and standard deviation of 1.5 is shown in Figure 12.5. The Excel function: also returns randomly generated observations from this distribution. a. Use
> Lynn Price recently completed her MBA and accepted a job with an electronics manufacturing company. Although she likes her job, she is also looking forward to retiring one day. To ensure that her retirement is comfortable, Lynn intends to invest $3,000 o
> The Harriet Hotel in downtown Boston has 100 rooms that rent for $150 per night. It costs the hotel $30 per room in variable costs (cleaning, bathroom items, etc.) each night a room is occupied. For each reservation accepted, there is a 5% chance that th
> The manager of Moore’s Catalog Showroom is trying to predict how much revenue will be generated by each major department in the store during the next year. The manager has estimated the minimum and maximum growth rates possible for reve
> The monthly demand for the latest computer at Newland Computers follows a normal distribution with a mean of 350 and standard deviation of 75. Newland purchases these computers for $1,200 and sells them for $2,300. It costs the company $100 to place an o
> Large Lots is planning a seven-day promotion on a discontinued model of 310 color television sets. At a price of $575 per set, the daily demand for this type of TV has been estimated as follows: Large Lots can order up to 50 of these TVs from a surplus
> The owner of a golf shop in Myrtle Beach, SC must decide how many sets of beginner golf clubs to order for the coming tourist season. Demand for golf clubs is random but follows a Poisson distribution with the average demand rates indicated in the follow
> Tarrows, Pearson, Foster, and Zuligar (TPF&Z) is one of the largest actuarial consulting firms in the United States. In addition to providing its clients with expert advice on executive compensation programs and employee benefits programs, TPF&Z
> The owner of a ski apparel store in Winter Park, CO must make a decision in July regarding the number of ski jackets to order for the following ski season. Each ski jacket costs $54 and can be sold during the ski season for $145. Any unsold jackets at th
> WVTU is a television station that has 20 thirty-second advertising slots during their regularly scheduled programming each evening. The station is now selling advertising for the first few days in November. They could sell all the slots immediately for $
> Hometown Insurance sells 10-year annuities to retirees who are looking for stable sources of investment income. Hometown invests the annuity funds it receives in an equity index fund with annual returns that are normally distributed with a mean of 9% and
> Branch banks must keep enough money on hand to satisfy customers’ cash demands. Suppose that the daily demand for cash at a branch of University Bank follows a lognormal distribution with means and standard deviation summarized as follo
> Under what condition(s) is it appropriate to use simulation to analyze a model? That is, what characteristics should a model possess in order for simulation to be used?
> Use Holt’s method to create a model that minimizes the MSE for the data set. Use Solver to determine the optimal values of a and b. a. What are the optimal values of a and b? b. Prepare a line graph comparing the predictions from Holt’s method versus the
> Create an exponential smoothing model that minimizes the MSE for the data set. Use Solver to determine the optimal value of a. a. What is the optimal value of a? b. Prepare a line graph comparing the exponential smoothing predictions against the origi
> Create a double moving average model (with k 5 4) for the data set. a. Prepare a line graph comparing the double moving average predictions against the original data. b. What are the forecasts for the next 2 years using this technique?
> Prepare a line graph of these data. Do the data appear to be stationary or nonstationary?
> Use Holt-Winter’s multiplicative method to create a seasonal model that minimizes the MSE for the data set. Use Solver to determine the optimal values of a, b, and g. a. What are the optimal values of a, b, and g? b. Prepare a line graph comparing the pr
> Mac Brown knew something had to change. As the new Vice President of Sales & Marketing for the PB Chemical Company, Mac understood that when you sell a commodity product, where there is minimal difference between the quality and price, customer service a
> Use Solver to determine the weights for a three-period weighted moving average that minimizes the MSE for the data set. a. What are the optimal values for the weights? b. Prepare a line graph comparing the weighted moving average predictions against the
> Use Holt-Winter’s additive method to create a seasonal model that minimizes the MSE for the data set. Use Solver to determine the optimal values of a, b, and g. a. What are the optimal values of a, b, and g? b. Prepare a line graph comparing the predicti
> Use the multiplicative seasonal technique for stationary data to model the data. Use Solver to determine the optimal values of a and b. a. What are the optimal values of a and b? b. Prepare a line graph comparing the predictions from this method against
> Use the additive seasonal technique for stationary data to model the data. Use Solver to determine the optimal values of a and b. a. What are the optimal values of a and b? b. Prepare a line graph comparing the predictions from this method against the or
> Prepare a line graph of these data. Do the data appear to be stationary or nonstationary?
> Use Holt-Winter’s multiplicative method to create a seasonal model that minimizes the MSE for the data set. Use Solver to determine the optimal values of a, b, and g. a. What are the optimal values of a, b, and g? b. Prepare a line graph comparing the pr
> Use Holt-Winter’s additive method to create a seasonal model that minimizes the MSE for the data set. Use Solver to determine the optimal values of a, b, and g. a. What are the optimal values of a, b, and g? b. Prepare a line graph comparing the predicti
> Use the multiplicative seasonal technique for stationary data to model the data. Use Solver to determine the optimal values of a and b. a. What are the optimal values of a and b? b. Prepare a line graph comparing the predictions from this method against
> Use the additive seasonal technique for stationary data to model the data. Use Solver to determine the optimal values of a and b. a. What are the optimal values of a and b? b. Prepare a line graph comparing the predictions from this method against the or
> Prepare a line graph of these data. Do the data appear to be stationary or nonstationary?
> A used-car broker needs to transport his inventory of cars from locations 1 and 2 in Figure 5.39 to used-car auctions being held at locations 4 and 5. The costs of transporting cars along each of the routes are indicated on the arcs. The trucks used to c
