BMGT45460 Decision Making and Negotiation

Purpose:

 

To structure a complex problem and analyse different risky courses of action; to assess the interaction of probabilities of event outcomes; to prepare and interpret risk profiles.

Task:

•  Answer parts (a) through (e) of the problem presented in this document.

•  Supplement your diagrams with a document (typed, 1.5 line spacing, 12 point Times Roman or other standard font, maximum length 5 pages of text excluding figures and tables) that outlines problem statements and assumptions, and presents your conclusions and recommendations.

• In your decision trees, ensure that you have clearly indicated all decision and chance nodes, probabilities, consequence values and expected values.

• Your decision trees can be either hand drawn (must be very neat and clear) or with the aid of a PC (such as the examples in lecture slides).

• Indicate clearly in your report how you arrived at your conclusions about probability distributions for chance events.

•  Your report should also show your expected value calculations.

This information has made him realise that he shouldn’t simply use a single-point estimate for the number of approved development hectares; he wants his decision reflect the level of uncertainty by taking account of five different possible outcomes, using the bracket medians approach.

(a)  Draw a decision tree that represents the decision that Tom has to make. Solve using the rollback process. Assume that his decision is based solely on expected value disregarding taxes, inflation and time value of money. Make a recommendation based on your findings. In your accompanying report, clearly explain the approach you took to modelling uncertainty in the problem, show any calculations or estimations you undertook, and demonstrate how you used the bracket medians method. (30 marks)

(b)  Tom has thought about the difference between his probability estimate for the success of Teaburn and the estimate made by Pat Leahy. He feels that this difference could enable him to develop a proposal that both he and Rochford could accept.

After working through a number of possibilities, Tom has developed a proposal to put to Pat Leahy. His proposal is that Rochford pays a cash sum of € 3.84 million, plus € 1.344 million per hectare if Teaburn is successful and €1.024 million per hectare if Teaburn fails. Show Tom’s decision tree for this new proposal. What is his expected value? (15 marks)

(c) Pat Leahy is weighing up which offer is better: the one he had originally made to Tom Byrne, or Tom’s revised proposal outlined in (b) above. Draw a decision tree of how that decision looks from Pat Leahy’s perspective and indicate which proposal he would prefer if he wishes to minimise the expected price paid for Marsh Meadow. (20 marks)

(d)  Suppose that Rochford is willing to accept Tom’s proposal outlined in (b). Prepare Tom’s cumulative risk profiles comparing the revised Rochford proposal (i.e. Tom’s new proposal) with the Wotton Estates bid. Draw conclusions and make recommendations, indicating whether there is a dominant risk profile. (30 marks) 

(e) Based on your findings in terms of both the expected value and risk profiles of Tom’s choices, what would you recommend?