HRC Diagnostics, a new venture for Block C Enterprises is considering the constr

Question

HRC Diagnostics, a new venture for Block C Enterprises is considering the construction of a private clinic. If the market is favorable, HRC could realize a significant rise in income. HRC hired a market research company to perform a study of the market. The results of the study are shown below:

High

Low

10000

30000

20000

40000

45000

35000

60000

20000

All profits are in dollars. Perform a sensitivity study to determine the value for Pr(Low) where the Ex-Large Clinic and the Large Clinic have the same profit.

High

Low

Small Clinic

10000

30000

Medium Clinic

20000

40000

Large Clinic

45000

35000

Ex-Large Clinic

60000

20000

Explanation / Answer

Expected profit for any type of clinic = Probability of high market x Profit in high market + Probability of low market x Profit in low market

Let probability of low market at which profits of both large clinic and ex large clinic are same = P

Therefore, Probability of high market at which profits of both large clinic and ex large clinic are same = ( 1 – P )

Therefore,

Profit for large clinic = 45000 x ( 1 – P) + 35000 x P

Profit for ex large clinic = 60,000 x ( 1- P) + 20000 X P

Since , profits in both these outfits will be same ,

Hence,

45000 x ( 1- P) + 35000.P = 60,000X( 1- P) + 20000.P

Or, 15000.P = 15000x ( 1- P)

Or , P = 1- P

Or, 2P = 1

Or, P = 0.5

PROBABILITY OF LOW PROFIT = 0.5

PROBABILITY OF LOW PROFIT = 0.5

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