GBA P207
DECISION ANALYSIS FOR BUSINESS
PROBLEM SET 1
Please read carefully the following instructions for submitting your problem set. I will deduct points for
not following instructions.
1. All problem sets are due one hour before the beginning of the live session.
2. Your name and the names of the members of your study group must appear at the top of the 1st
page of your responses to each question of the problem set. Please highlight your own name.
3. Remember that study groups are important for learning, but they are not for a division of labor
on your problem sets. Your problem set responses must be your own, and written in your own
words.
4. Be sure to show all your work and explain your answers and assumptions fully. Partial credit is
given whenever possible. Credit cannot be given for work that is illegible.
5. Please email your responses to me at XXXXXXXXXX
6. Make sure that you label the files as follows:
. For e.g.
Q1_Jayshree_Venkatesan. You can use word doc, ppt or excel.
mailto: XXXXXXXXXX
1. INTERNET TRAINING STARTUP
Cecelia wants to start an Internet Training business. Based on demand, she has determined that she
can charge participants $150 to attend. She does not yet have her own facility, so will have to rent a
oom in the beginning. She can rent a room for $1000 per session. The cost of the instructor,
inging in the equipment, and advertising is $2000 per session. Course materials, which she must
provide, cost $25 per student. The room Cecelia rents can hold a maximum of 40 students.
(a) Write an expression for the Cecelia’s total revenue per training session.
(b) Write an expression for Cecelia’s total cost per training session.
(c) How many students must Cecelia have per session to
eak even?
(d) Create a spreadsheet to show the profit level per session for different numbers of
students enrolled.
(e) In the beginning, Cecelia thinks it is realistic to expect only 20 students to attend. What
price should she charge them to
eak even?
(f) If Cecelia has no other costs or revenues, how many sessions must she teach at
maximum capacity to earn enough profits to invest them in obtaining her own facility,
when the facility costs $210,000? (assume the original price of $150 per participant).
2. ORES R US
Ores R Us (ORU) is a large international minerals company considering a bid for the exploration and
mining rights on a large tract of land in the country Nova. Through contacts in the Novan Ministry of
Mining, ORU has learned that a cash bid of $90 million would be “nearly certain” to win ORU these
ights. Based on this information and on experience in similar situations, ORU executives believe a bid
of $90 million would have a 95% chance of winning the rights. However, given Nova’s cu
ent financial
situation and only moderate interest from competitors, ORU executives believe they may be able to
win the rights with a lower bid. Consequently, ORU is considering two other bid levels: $40 million
and $65 million, as well as not bidding at all. Analysts believes these bids would have a 33% and 75%
chance, respectively, of winning the rights to this tract.
ORU already knows a valuable mineral deposit lies within the tract, but the size of the deposit remains
highly uncertain. Sensitivity analysis has shown that the size of the deposit is the crucial factor in
evaluating the tract’s profitability — i.e., it is much more important than the other uncertainties
present. Based on their analysis of available data and their professional experience, ORU’s geologists
have developed the following probability estimates for the deposit:
Size of Deposits Probability
20 million tons .185
40 million tons .630
80 million tons .185
Values for profit margin per unit are estimated at $4 per ton and the cost of development is estimated
to be $70 million.
(a) Draw the decision tree for ORU including all probabilities and payoffs.
(b) Solve ORU’s decision tree. What will ORU do?
(c) Is ORU happy with this outcome? Explain.
(d) What, if anything, can ORU do to improve the outcome? Does this change the decision tree?
Explain.
GBA P207
DECISION ANALYSIS FOR BUSINESS
PROBLEM SET 1
Please read carefully the following instructions for submitting your problem set. I will deduct points for
not following instructions.
1. All problem sets are due one hour before the beginning of the live session.
2. Your name and the names of the members of your study group must appear at the top of the 1st
page of your responses to each question of the problem set. Please highlight your own name.
3. Remember that study groups are important for learning, but they are not for a division of labor
on your problem sets. Your problem set responses must be your own, and written in your own
words.
4. Be sure to show all your work and explain your answers and assumptions fully. Partial credit is
given whenever possible. Credit cannot be given for work that is illegible.
5. Please email your responses to me at XXXXXXXXXX
6. Make sure that you label the files as follows: . For e.g.
Q1_Jayshree_Venkatesan. You can use word doc, ppt or excel.
mailto: XXXXXXXXXX
1. INTERNET TRAINING STARTUP
Cecelia wants to start an Internet Training business. Based on demand, she has determined that she
can charge participants $150 to attend. She does not yet have her own facility, so will have to rent a
oom in the beginning. She can rent a room for $1000 per session. The cost of the instructor,
inging in the equipment, and advertising is $2000 per session. Course materials, which she must
provide, cost $25 per student. The room Cecelia rents can hold a maximum of 40 students.
(a) Write an expression for the Cecelia’s total revenue per training session.
(b) Write an expression for Cecelia’s total cost per training session.
(c) How many students must Cecelia have per session to
eak even?
(d) Create a spreadsheet to show the profit level per session for different numbers of
students enrolled.
(e) In the beginning, Cecelia thinks it is realistic to expect only 20 students to attend. What
price should she charge them to
eak even?
(f) If Cecelia has no other costs or revenues, how many sessions must she teach at
maximum capacity to earn enough profits to invest them in obtaining her own facility,
when the facility costs $210,000? (assume the original price of $150 per participant).
2. ORES R US
Ores R Us (ORU) is a large international minerals company considering a bid for the exploration and
mining rights on a large tract of land in the country Nova. Through contacts in the Novan Ministry of
Mining, ORU has learned that a cash bid of $90 million would be “nearly certain” to win ORU these
ights. Based on this information and on experience in similar situations, ORU executives believe a bid
of $90 million would have a 95% chance of winning the rights. However, given Nova’s cu
ent financial
situation and only moderate interest from competitors, ORU executives believe they may be able to
win the rights with a lower bid. Consequently, ORU is considering two other bid levels: $40 million
and $65 million, as well as not bidding at all. Analysts believes these bids would have a 33% and 75%
chance, respectively, of winning the rights to this tract.
ORU already knows a valuable mineral deposit lies within the tract, but the size of the deposit remains
highly uncertain. Sensitivity analysis has shown that the size of the deposit is the crucial factor in
evaluating the tract’s profitability — i.e., it is much more important than the other uncertainties
present. Based on their analysis of available data and their professional experience, ORU’s geologists
have developed the following probability estimates for the deposit:
Size of Deposits Probability
20 million tons .185
40 million tons .630
80 million tons .185
Values for profit margin per unit are estimated at $4 per ton and the cost of development is estimated
to be $70 million.
(a) Draw the decision tree for ORU including all probabilities and payoffs.
(b) Solve ORU’s decision tree. What will ORU do?
(c) Is ORU happy with this outcome? Explain.
(d) What, if anything, can ORU do to improve the outcome? Does this change the decision tree?
Explain.
1
GBA P207
DECISION ANALYSIS FOR BUSINESS
PROBLEM SET 3
Please read carefully the following instructions for submitting your problem set.
1. All problem sets are due one hour before the beginning of the live session on the due
date.
2. Your name and the names of the members of your study group must appear at the top
of the 1st page of your responses to each question of the problem set. Please highlight
your own name.
3. Remember that study groups are important for learning, but they are not for a division
of labor on your problem sets. Your problem set responses must be your own, and
written in your own words.
4. Be sure to show all your work and explain your answers and assumptions fully. Partial
credit is given whenever possible. Credit cannot be given for work that is illegible.
5. Just like PS1, please make sure you submit your answers over email to me at
Jayshree