ndive el WIth a guaranteed profit of $30 million. Construct a sequential decisio

Question

ndive el WIth a guaranteed profit of $30 million. Construct a sequential decision tree for this decision situation and determine whether the company should make a bid. 4. Mary Decker is suing the manufacturer of her car because of a defect that she believes caused her to have an accident, and kept her out of work for a year. She is suing the company for $3.5 million. The company has offered her a settlement of S700,000, of which Mary would receive $600,000 after attorneys' fees. Her attorney has advised her that she has a 50% chance of winning her case. If she loses she will incur attorneys' fees and court costs of $75,000. If she wins she is not guaranteed her full requested settlement, her attorney believes that there is a 50% chance she could receive the full settlement, in which case Mary would get S2 million after her attorney takes his cut, and a 50% chance that the jury will award her a lesser amount of $1,000,000, of which Mary would get S500,000. Using a decision-tree analysis, decide if Mary should sue the manufacturer

Explanation / Answer

The expected present value of the decision in case the settlement is agreed ot is given to be $600,000.

Now in case there is no settlement made, there are 3 possibilities that could happen in case suing is done. These are given to be:

Therefore expected present value in this case would be given as:

= 0.5*(-75,000) + 0.25*(2,000,000) + 0.25*(500,000)

= -37,500 + 500,000 + 125,000

= $ 587,500 which is less than $600,000

Therefore she should not sue the manufacturer and should have the settlement.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.