Question

1. Limousine Inc. must decide how many new limousines to buy. The owner has narrowed down the decision to two choices: buy one limousine or two limousines.  If only one limousine is bought and demand ridership is high, a second limousine can be bought later.  The probability of high demand is ridership 0.65, and the probability of low demand ridership is 0.35.  The net present value obtained with the purchase of two limousines is $100,000 if demand is high and $65,000 if demand is low.  The net present value for one limousine and low demand is $55,000.  If demand is high, there are two options.  The first option is to buy a second limousine.  This option has a net present value of $80,000.  The second option is to do nothing, which would have a net present value of $50,000.

a. Develop a decision tree for this problem.

       b. Analyze the decision tree and determine how many limousines should be bought initially

Answer 1

Answer a :-

Low demand udin ship D.35 1 Lumousino 0.65 Hegh demand utuou p Do XBuy mauh-yo I umousine LumawIhe 35 Low demand LAudershup O 65 domand Payoft 1000

Answer b :-

Option 1 - Buy two limousine together .

Probability	Impact	Risk Contingency
0.35	65000	22750
0.65	100000	65000
	EMV	87750

Option 2 - Buy one limousine only.

Probability	Impact	Risk Contingency
0.35	55000	19250
0.65	50000	32500
	EMV	51750

Option 3 - Buy another limousine after some time .

Probability	Impact	Risk Contingency
0.35	55000	19250
0.65	80000	52000
	EMV	71250

Maximum EMV = $87750

Number of limousine that should be purchased initially = 2 limousine