hello so i got a question from my teacher and wanna make sure its correct

here is the question:

A company is considering the strategy to further expand its activity into a foreign market it recently accessed. The foreign government has announced that a new industrial site will be offered for sale on a competitive tender basis, the site going to the company making the highest bid. The multinational has a good experience with this type of auctions, and – based on its assessment – it decides that if it is to bid for the site, it will place a bid of £750 million. In the past, 70 percent of the company’s bids for such type of projects have been successful.

The marketing department indicates that expansions of the multinational’s foreign market activity can be expected to generate revenue of around £1,500 million if demand turns out to be high, versus only £500 million if demand turns out to be low. Data scientists have indicated that the probability of high demand is 0.60.

If the company is successful in its bid, it will also have to decide whether to construct a new plant for the site or to move an existing plant which has proven to be inefficient. Building the new plant from scratch costs £250 million, while moving the existing plant costs around £100 million. However, in case demand proves to be high, the new plant, equipped with state-of-the-art technology, would boost production by an additional £150 million.

The same multinational company is also under pressure to refurbish another of its existing plants. The £750 million could be used for this purpose, instead. If the money is used for refurbishment, there is a 50 percent chance of increasing efficiency to generate a return of 5 percent on the £750, and a 50 percent chance of generating a return of 10 percent. If the decision to refurbish takes place after the bid has been made and failed, £500 million will be invested for refurbishment.

1)Construct a decision tree for this problem and suggest a suitable decision for management

2)What is the maximum bid the company should consider? What is the value of perfect information about foreign market demand?

3)Can you explain why and how your answer in part A would change, if management had different attitude to risk (pessimistic vs optimistic)?

In picture 1 and 2 are my answers i am not sure if they are correct.
Transcribed Image Text:W AutoSave Off ▾ Document1 - Word Search File Home Insert Draw Design Layout References Mailings Review View Help Times New Roman 12 A A Aa ▾ 酒 Paste BIU ab A v Ро A E✓ += ་ Normal [= ▾ 魚 Clipboard ly Font Гу Paragraph No Spacing Heading Heading 2 Title Styles High demand (60 percent chance): £1,500 million - £100 million (cost) = £1,400 million can be produced. 40% probability of low demand results in £500 million - £100 million (cost) = £400 million. Refurbishing another plant is an option if the bid fails (30% chance) or if the company chooses not to bid. The refurbishment outcomes are: Upgrading an already-existing facility (£750 million, or £500 million in the event of a lost bid): 50% probability of a 5% yield. 10% return with a 50% chance. Calculated the expected values: Bidding for the Site and Building a New Plant: loss of £92 million. Bidding for the Site and Moving the Existing Plant: loss of £50 million. Refurbishing an Existing Plant with £750 million Initially: £56.25 million. Refurbishing an Existing Plant with £500 million After a Failed Bid: £112.5 million. These calculations suggest that the company would be better off concentrating on renovating an existing plant rather than putting in a bid for the industrial site. This option guarantees a positive return on investment and eliminates the risks related to the bid and the construction/movement of plants. 841 words English (United Kingdom) Text Predictions: On Accessibility: Investigate Q Search Page 4 of 5 FTSE 350 +1.03% < > >> ☑ Irfanullah Musazai IM o ☑ Editing Share Comments Find v Replace Dictate Editor Add-ins Select Editing Voice Editor Add-ins Focus 110% 12:25 12/04/2024 PRE
Transcribed Image Text:O Search ་ Normal References Mailings Review View Help W AutoSave Off 周り Document1 - Word File Home Insert Draw Design Layout Times New Roman ✓ 12 A A Aa A LG Paste BI Uab ×₂ x² A ✓ A ✓ Clipboard Font √☑ Paragraph ly EV: £56.25m Refurbish start initially BID(£750m) No Spacing Heading Heading 2 Title Bid won(70%) Refurbish New Plant Styles Move Plant Bid lost(30%) EV: £1400m HIGH Demand EV: £250m LOW Demand HIGH Demand LOW Demand EV: £1400m EV: £400m Irfanullah Musazai IM 0 X Comments Find ▾ Editing Share Replace Editor Dictate ΙΠΠ Add-ins Select ly Editing Voice Editor Add-ins | > | > English (United Kingdom) Text Predictions: On The Site and Plant Decision Bidding Process The company will have to choose between moving the current plant and building a new one if the bid is successful (there is a 70% chance of success). The demand determines each choice's expected value (EV): constructing a new plant at a cost of £250 million: Excessive demand (60 percent chance): Produces £1,500 million plus an extra £150 million in production - £250 million in costs = £1,400 million. Low demand (probability of 40%): Produces £500 million less the cost of £250 million, or £250 million. Relocating the current plant will cost £100 million. High demand (60 percent chance): £1,500 million - £100 million (cost) = £1,400 million can Accessibility: Investigate Page 4 of 5 841 words 19°C Mostly cloudy Q Search W DFocus 110% 12:25 12/04/2024 PRE

Question

hello so i got a question from my teacher and wanna make sure its correct

here is the question:

A company is considering the strategy to further expand its activity into a foreign market it recently accessed. The foreign government has announced that a new industrial site will be offered for sale on a competitive tender basis, the site going to the company making the highest bid. The multinational has a good experience with this type of auctions, and – based on its assessment – it decides that if it is to bid for the site, it will place a bid of £750 million. In the past, 70 percent of the company’s bids for such type of projects have been successful.

The marketing department indicates that expansions of the multinational’s foreign market activity can be expected to generate revenue of around £1,500 million if demand turns out to be high, versus only £500 million if demand turns out to be low. Data scientists have indicated that the probability of high demand is 0.60.

If the company is successful in its bid, it will also have to decide whether to construct a new plant for the site or to move an existing plant which has proven to be inefficient. Building the new plant from scratch costs £250 million, while moving the existing plant costs around £100 million. However, in case demand proves to be high, the new plant, equipped with state-of-the-art technology, would boost production by an additional £150 million.

The same multinational company is also under pressure to refurbish another of its existing plants. The £750 million could be used for this purpose, instead. If the money is used for refurbishment, there is a 50 percent chance of increasing efficiency to generate a return of 5 percent on the £750, and a 50 percent chance of generating a return of 10 percent. If the decision to refurbish takes place after the bid has been made and failed, £500 million will be invested for refurbishment.

1)Construct a decision tree for this problem and suggest a suitable decision for management

2)What is the maximum bid the company should consider? What is the value of perfect information about foreign market demand?

3)Can you explain why and how your answer in part A would change, if management had different attitude to risk (pessimistic vs optimistic)?

In picture 1 and 2 are my answers i am not sure if they are correct.

W
AutoSave
Off
▾ Document1 - Word
Search
File Home Insert Draw
Design Layout
References Mailings
Review
View
Help
Times New Roman
12 A A Aa ▾
酒
Paste
BIU ab
A
v
Ро
A
E✓
+=
་
Normal
[= ▾
魚
Clipboard
ly
Font
Гу
Paragraph
No Spacing Heading Heading 2 Title
Styles
High demand (60 percent chance): £1,500 million - £100 million (cost) = £1,400 million can
be produced.
40% probability of low demand results in £500 million - £100 million (cost) = £400 million.
Refurbishing another plant is an option if the bid fails (30% chance) or if the company
chooses not to bid. The refurbishment outcomes are:
Upgrading an already-existing facility (£750 million, or £500 million in the event of a lost
bid): 50% probability of a 5% yield.
10% return with a 50% chance.
Calculated the expected values:
Bidding for the Site and Building a New Plant: loss of £92 million.
Bidding for the Site and Moving the Existing Plant: loss of £50 million.
Refurbishing an Existing Plant with £750 million Initially: £56.25 million.
Refurbishing an Existing Plant with £500 million After a Failed Bid: £112.5 million.
These calculations suggest that the company would be better off concentrating on renovating
an existing plant rather than putting in a bid for the industrial site. This option guarantees a
positive return on investment and eliminates the risks related to the bid and the
construction/movement of plants.
841 words
English (United Kingdom)
Text Predictions: On
Accessibility: Investigate
Q Search
Page 4 of 5
FTSE 350
+1.03%
< > >>
☑
Irfanullah Musazai
IM
o
☑
Editing
Share
Comments
Find
v
Replace
Dictate
Editor Add-ins
Select
Editing
Voice
Editor
Add-ins
Focus
110%
12:25
12/04/2024
PRE

O Search
་
Normal
References Mailings Review View Help
W
AutoSave
Off 周り
Document1 - Word
File
Home
Insert Draw Design Layout
Times New Roman ✓ 12
A A Aa A
LG
Paste
BI Uab ×₂ x² A
✓
A
✓
Clipboard
Font
√☑
Paragraph
ly
EV: £56.25m
Refurbish
start
initially
BID(£750m)
No Spacing Heading Heading 2
Title
Bid
won(70%)
Refurbish
New Plant
Styles
Move Plant
Bid
lost(30%)
EV: £1400m
HIGH Demand
EV: £250m
LOW Demand
HIGH Demand
LOW Demand
EV: £1400m
EV: £400m
Irfanullah Musazai
IM
0 X
Comments
Find ▾
Editing
Share
Replace
Editor
Dictate
ΙΠΠ
Add-ins
Select
ly
Editing
Voice
Editor
Add-ins
| > | >
English (United Kingdom) Text Predictions: On
The Site and Plant Decision Bidding Process
The company will have to choose between moving the current plant and building a new one if
the bid is successful (there is a 70% chance of success). The demand determines each
choice's expected value (EV):
constructing a new plant at a cost of £250 million:
Excessive demand (60 percent chance): Produces £1,500 million plus an extra £150 million
in production - £250 million in costs = £1,400 million.
Low demand (probability of 40%): Produces £500 million less the cost of £250 million, or
£250 million.
Relocating the current plant will cost £100 million.
High demand (60 percent chance): £1,500 million - £100 million (cost) = £1,400 million can
Accessibility: Investigate
Page 4 of 5
841 words
19°C
Mostly cloudy
Q Search
W
DFocus
110%
12:25
12/04/2024
PRE

Accepted Answer

Part 2: Explanation:Step 1:To calculate the maximum bid the company should consider, we need to…