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1) MicroProducts, Incorporated (MPI), manufactures printed circuit boards for a major PC manufacturer. Before a board is sent to the customer, three...
1) 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, the entire board must be scrapped. The costs of testing the three components are provided in the following table, along with the probability of each component failing the test: Component Cost of Test Probability of Failure X $1.75 0.125 Y $2.00 0.075 Z $2.40 0.140 a. Draw this tree by hand and include it along with your submission b. Implement your tree from part a in Precision Tree. Print the tree out in a single page and include it along with your submission. c. State the optimal decision strategy regarding the order in which the components be tested? d. What is the expected cost of performing the tests in this sequence? Your submission to this question should be a word or pdf file with all of the answers for the parts a through d. Please also submit the spreadsheet containing the Precision tree implementation for part b.
2) Southern Gas Company (SGC) is preparing to make a bid for oil and gas leasing rights in a newly opened drilling area in the Gulf of Mexico. SGC is trying to decide whether to place a high bid of $16 million or a low bid of $7 million. SGC, expects to be bidding against its major competitor Western Gas Corporation (WGC) and predicts WGC to place a bid of $10 million with a probability of 0.4 or a bid of $6 million with probability 0.6. Geological data collected at the drilling site indicates a 0.15 probability of the reserves at the site being large, a 0.35 probability of being average, and a 0.5 probability of being unusable. A large or average reserve would most likely represent a net asset value of $120 million or $28 million, respectively, after all drilling and extraction costs are paid. The company that wins the bid will drill an exploration well at the site for a cost of $5 million. a. Develop a decision tree for this problem. Draw this tree by hand and include it along with your submission. b. Implement your Decision Tree in Precision Tree. Then print out your solved decision tree on a single page and attach it as a part of your submission. c. What is the optimal decision according to the EMV criterion? d. Perform one-way sensitivity analysis showing how the optimal decision would change if the probability of WGC bidding $10 million varies from 0% to 100% in steps of 10%. Attach the Sensitivity Graph and Strategy Region with your submission. e. Perform two-way sensitivity analysis showing how the optimal decision would change if the net asset value of a large reserve varies from $100 million to $140 million in $5 million increments and the net asset value of an average reserve varies from $20 million to $36 million in increments of $2 million. Attach the Strategy region with your submission
