Suppose a University is considering creating a new brand-new major, Medical Scie

Question

Suppose a University is considering creating a new brand-new major, Medical Science, in 2016. If the University sticks with its current curriculum and creates no further majors, then the annual revenue will be tuition ($11.5 million), donation ($4.4 million), and research grants ($2.5 million). At the same time, the University incurs costs such as employee salaries ($6 million), rent ($5 million), and utilities ($2.2 million) to maintain its business annually.

If this University decides to create new majors, then there are three possibilities. First, if medical research proves to be successful, and new faculty members in medical science, receive funding more actively from the state and federal government, then annual research grants are expected to increase from $2.5 to $8 million. Also, medical research alumni are likely to donate funds to the University in the future, which also is expected to increase the amount of donation from $4.4 to $6 million, so the total revenue would increase by $7.1 million. On the other hands, the university should hire more staff/faculties in those areas, which would increase employee salaries from $6 to $8 million, while rent and utilities stay the same as under “offering no new major” option. However, business analysts expect this probability to be 35%. Second, there is also a 40% chance that faculties in medical science have a hard time receiving federal research funds due to the recession, in which case, the research grants decreases from $2.5 to $0.7 million, while revenues from tuition and donation stay the same as under “offering no new major” option. In this scenario, the University will still have to pay employment salary ($8 million) and rent and utilities stay the same as under “offering no new major” option. Finally, uncertain economic or regional factors may lead to a huge drop in enrollment, decreasing tuition revenue. The boom in the housing market and recent drought increases rent and utilities dramatically. In other words, there is a 25% chance that the University is suffering a loss of $3.5 million (net profits), if it chooses to offer a new major.

1. Draw a decision tree

2. Make a recommendation regarding whether the University should offer a new major or stick to its current curriculum, using at least 150 words (Hint: You MUST calculate the expected net profit of the option “offering a new major” and compare it to the net profit of the option of “offering no new major”)

3. Why do you think it is important to promote diversity of the curriculum of higher education in terms of both teaching and research.

Explanation / Answer

The decision tree is shown in fig above

If we do not go for the new major the total expected profit:

revenue - expenses = tuition +donation+grants-salaries-rent-utilities = 11.5+4.4+2.5-6-5-2.2 = 5.2 million

IF we go for the decision of offereing new major we have 3 options:

1. successful: extra revenue of 7.1 million and extra expenses of 2 million from salaries

total revenue = old + additional = 5.2+7.1-2 = 10.3 million

2. Neutral, only grant goes down from 2.5 to 0.7, and salaries increase from 6 to 8 million

total revenue = 5.2 + (0.7-2.5) - 2 = 1.4 million

3. Loss: total loss given as 3.5 million

Solving the decision tree for expected value of the option "offering a new major":

35%*successful + 40%*neutral + 25%*loss

.35*10.3 + .4*1.4 + .25*(-3.5)

= 3.605+0.44 - 0.875

= 3.17 million

2. When comparing the expected value of offering new major to no new major we see that the expected value of no new major has come out to be higher at 5.2 million hence it is suggested that the university take the decision to offer no new major at this point of time.

3. It is important to promote diversity in higher education because then people will have options to take for choosing their profession and career and they can excel in those fields which they are really interested in. In terms of university, the university gains more students and exposure to different fields of sciences and helps them develop new skills.

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