COMM 652: Assignment #1 Please Note: This is an individual assignment. Identical assignments will receive a mark of 0 and serious consequences to your academic transcript may result. Collaboration is highly recommended but please make sure that your write up of the solutions has come solely from you! Due: Sat., Oct 23rd at 6pm. Please upload ONE zipped file that contains both your Word document (or PDF file) (that contains ALL your detailed solutions to all 3 questions in one file for easy grading) along with your supporting Excel file in to Blackboard. All work must be clearly documented and neat or marks will be deducted. All your work should be copied and pasted into one Word document for proper formatting (please see page 4 of this assignment for formatting tips). All decision trees from Treeplan.xla and Payoff/Regret Tables must be copy/pasted and formatted so that they fit on one page only. Pictures of hand‐ drawn decision trees should also be incorporated into your Word document as a picture (using your phone to take a picture of hand‐drawn trees will suffice). Please use a separate worksheet in one Excel file for each question and label them respectively. Final statements for all questions are necessary or marks will be deducted. All work must be received by the due date or you will be heavily penalized marks. Generally, no late papers will be accepted unless this is extenuating circumstances. 1 of 4 Question 1 A buyer at Best Buy electronics is trying to decide how many wearable technology devices to purchase from a company called “Muse” for the upcoming Winter Holiday Season. The problem being is that the product is apparently high in demand and it will take 2.5 months to fill any orders placed with the company. Most importantly, the product has no known demand characteristics because it is has never previously been sold at Best Buy. According to company purchasing procedures, Best Buy has a policy to execute purchasing decisions by looking at demand profiles for products with similar technology characteristics. The buyer has been requested to make the purchasing decision for the new product using the following demand characteristics of similar innovative products sold by Best Buy: Best Buy has negotiated the cost of the device for $185 per unit and intends to sell the product for $295. There is the possibility that the wearable technology device will not be successful and any remaining unsold units after the holiday season will be liquidated using a blow-out sale in the Spring for $115 each. The buyer also knows that in previous years when demand for new electronic products exceeded supply, there was a cost to business through loss of future sales, good will, etc. Assuming the demand and costing information above is accurate, answer the following questions by developing a spreadsheet model using Excel (do not use paper and pencil): a. Construct the payoff table. Use an estimated additional cost (loss) of $20.00 per device whenever demand exceeds supply. b. What decision should be made according to the maximax decision rule? c. What decision should be made according to the maximin decision rule? d. What decision should be made according to the EMV decision rule? e. What decision should be made according to the minimax regret decision rule? f. What decision should be made according to the EOL decision rule? g. How much should the buyer be willing to pay to obtain a demand forecast that is 100% accurate? Note: There is no need to create complicated Excel formulas to create your payoff table. Keep it simple! Please make sure to have a concluding statement for each of the above decision rules or marks will be deducted. Question 2: The owner of a BC Company called “WEEDS” is considering the purchase of one of the largest marijuana production facility that is currently up for sale in Calgary Alberta. The production of marijuana in Canada is expected continued growth over the next decade due to legalization and growing sales beyond medicinal purposes. There is uncertainty however with respect to how provincial governments will authorize the legal production of marijiuana amongst various producers. The Alberta government restricts production to only a select number of facilities (15 in total) in the province and it is uncertain if there is a transfer in ownership of the facility if WEEDS would be still be allowed to legally produce. The owner has conducted some research into the Alberta’s government rules to authorize specific production facilities and feels there’s an 80% likelihood that this facility being sold will still be one of the 15 authorized producers for the province. The sale of the production facility is to be determined at a sealed bid auction next week. The owner of WEEDs estimates that if he bids $900,000, there is a 25% chance that he will obtain the facility; if he bids $1.35 million, there is a 45% chance that he will obtain the facility; and if he bids $1.75 million, Demand: 100 200 300 400 500 600 700 800 900 1000 Probability 0.050 0.075 0.100 0.150 0.200 0.175 0.100 0.075 0.050 0.025 2 of 4 there is an 85% chance that he will obtain the facility. If he acquires the production facility and the facility is the legally authorized to produce, he estimates to make $2.2 million in profit during the first year of operation. However, if the Alberta government fails to authorize the facility, he expects to salvage the facility for only $250,000. Please complete the following to help the owner of WEEDs with his decision making strategy: a) Using Treeplan.xla, create a decision tree for this problem using the first year of operation as a time boundary. Provide a clear statement of the optimal decision strategy according to the EMV decision criterion. b) State the risk profile of the optimal decision strategy in part a). c) Create a sensitivity table using Data Tables in Excel to show how the optimal decision may change if the probability of the production facility being one of the 15 authorized producers varies from 0% to 100% in steps of 10%. Be sure to provide a statement saying what the sensitivity table means in the context of the decision problem. d) Develop a second sensitivity table showing how the overall optimal decision may change if the facility is authorized to produce and if profits of the new production facility varies from $2 to $3 million dollars in steps of $100,000. Again, state what the sensitivity table means. Question 3 Part I: A number of doctors are considering building and opening laser surgery clinic in downtown Vancouver offering treatments for conditions like myopia, hyperopia, astigmatism and presbyopia. Unfortunately, there is great uncertainty over the next couple of years associated with private healthcare clinics in BC and there is a risk that the doctors could be shut down if they were to go ahead with their clinic. If the government liberalizes access to private health clinics in the next year, the doctors have estimated a net profit of $100,000 in the first year of operation. If the government tightens access, they have an estimated a loss of $60,000 in the first year. Of course, they do not need to proceed at all, in which case there is no cost. In the absence of any data on changing political guidelines, the best the surgeons can guess is that there is a 50-50 chance the clinic will be successful. a) Given only this information above, draw a decision tree by hand to help analyze this problem. Using the EMV decision criterion, what they do? Part II: The doctors have been approached by a research firm that offers to perform a research study (survey, analysis, etc) of trends in government health care decisions for a fee of $10,000. The market researchers claim that their experience enables them to make the following statements of probability: P(positive research study) AND P(favourable market demand) = 0.55 P(positive research study) AND P(unfavourable market demand) = 0.15 P(negative research study) AND P(favourable market demand) = 0.03 P(negative research study) AND P(unfavourable market demand) = 0.27 b) Develop a second decision tree for the surgeons to reflect this new option of hiring the research firm prior to the possibility of opening the clinic. Draw this decision tree by hand and evaluate it using the EMV decision criterion. Provide a final statement of the optimal decision strategy for the surgeons according to the EMV decision criterion. d) Use Treeplan to evaluate the decision tree in part b). Take a picture of it and include it with your Word document for submission. Hint: It should be understood that “favourable market demand” implies that the government will liberalize access to private clinics (hence the result would be “high market demand” for the clinic) and “unfavourable market demand” implies the government will tightens access to private clinics (hence the result would be “low market demand” for the clinic). Likewise, positive and negative “research study” are the results derived by the research firm that predicts the likelihood of the clinic being successful or unsuccessful. 3 of 4 Formatting Tips for Assignment #1 Working between Excel and Word One way to format your payoff table or decision tree is to copy it in Excel and paste it into Word as a picture that can be modified in terms of its size. This is a great way to format data produced in Excel and incorporated into a report in Word. 1. Highlight your decision tree (or payoff table) with your mouse in Excel and select copy 2. Open Word and select Paste (more arrow) and then Paste Special 3. Select “Picture” and press Okay. 4. You will now be able to select the corner of the pasted picture and modify its size so that it is legible and clear to the reader. Happy formatting! 4 of 4
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