Report
The business projects are always associated with risks, and the owner has to make the decision. Typically, decisions that are more profitable are associated with higher risks. Therefore, the owner has to choose if he wishes to bear a risk and earn a lot, or he takes more secure, yet less profitable option (Koller).
The High Right case has a significant advantage since the owner knows the risk probabilities associated with the decisions. The decision tree illustrates the outcomes of all the possible decisions (Fig. 1).Table 1 presents the payoff table, which illustrates the losses and profits.
* The amounts in bracket illustrate losses
The data in Table 1 are used to calculate the expected monetary value (EMV), the expected potential loss (EPL), and the expected value of the perfect information (EVPI). The formula used for the calculations (Black):
EMV=i=1n(Market Value∙Probability)
EPL=i=1n(Potential Loss∙Probability)
EVPI=EMV+EPL,
where i and n stand for the possible decisions, the Market Value and Potential Loss are from payoff table (Table 1).
The results are presented in Table 2.
The expected monetary value, potential loss, and the value of the perfect information
The data in Table 2 are sufficient for the decision-making. The decisions are chosen basing on strategies. The choice of the strategy depends on the financial situation of the owner, readiness to risk the funds, credit situation, and personal characteristics. The typical strategies are maximax and maximin, and the regret (Drury). Maximax strategy is a strategy with the maximum potential profit (Mix strategy for the Ski Right case). Maximin strategy minimizes loss (Progressive Products). The regret strategy refers to the choice of the less profitable strategy, followed by the regret of its choice (Leadville Barts).
Therefore, if President of Ski Right Helmets is ready to bear a risk of losing $16,500, he should use Mix strategy. Then, if the market situation is excellent or good, he will earn the highest profit among the offered strategies. In this case, there will be no regret.
The decision tree presents all the values in graphical form to make the decision obvious. All possible cases are illustrated as branches of the decision tree, and the financial results are also available.
In case the President has liabilities and not willing to take a risk, he is to choose the maximin decision, which is Progressive Products strategy. In case of failure, he loses only $1,100, though the earning opportunities are limited to $1,800.
There is a possibility that the President is not bound with the significant liabilities. willing to take a moderate risk and try himself in the business, he can choose Tal Rad company. The potential loss is $4,500, yet the possible profit is $5,400. However, in case of the good market the cost of the lost opportunity is $2,500 - $900 = $1,600, so the owner loses some profit.
Works Cited
Black, Ken. Business Statistics: For Contemporary Decision Making. Hoboken, NJ: Wiley, 2008. Print.
Drury, Colin. Management Accounting for Business. London: Thomson, 2005. Print.
Koller, Glenn. Risk Assessment and Decision Making in Business and Industry: A Practical Guide. Taylor & Francis Ltd, 2005. Print.
