Question One
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Introduction A group of medical professionals (doctors, dentists, physiotherapists etc) is considering building a private hospital in a remote part of South America. If medical demand is high (i.e. if there is a favourable market for the hospital’s services), the group could make a profit of
If the market is not favourable, they could lose
A market of medium favourability should provide a profit of
The group have the optiomn to not proceed at all [in which case there is no cost].
In the absence of any market data, the best the group can estimate is that there is a 50: 10: 40 chance that the hospital will be successful (i.e. 50:10:40 probability of a :favourable market, medium favourability, not favourable).
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(a)
Draw a decision tree that describes the above decision problem and advise the group on the optimal decision.
(12 marks)
The same group of medical professionals, have been quoted a fee of
90,000 by a business planning organisation to undertake a market research study. The organisation claims their experience has enabled them to use Bayes’ theory to make statements of probability. These are the twelve statements:
1.
The market will be favourable = 0.40
2.
The market will be of medium favourability = 0.30
3.
The market will be unfavourable = 0.30
4.
A favourable market will result from a favourable study = 0.85
5.
A medium favourability market will result from a favourable study = 0.10
6.
An unfavourable market will result from a favourable study = 0.05
7.
A favourable market will result from a medium favourable study = 0.20
8.
A medium favourability market will result from a medium favourable study = 0.60
9.
An unfavourable market will result from a medium favourable study = 0.20
10.
A favourable market will result from an unfavourable study = 0.10
11.
A medium favourability market will result from an unfavourable study = 0.20
12.
An unfavourable market will result from an unfavourable study = 0.70
(b)
Develop a new decision tree for the medical professionals to reflect the options now open with the market study.
(12 marks)
(c) Use the Expected Monetary Value (EMV) approach and recommend an optimal strategy. (please calculate monetary figures to 2 decimal places)
(12 marks)
(d) List a number of potential construction and operational risks that the group should consider given the proposed hospital is located in a remote area abroad. (6 marks)
(e) With reference to the diagram below; provide further details of [a] one of the risks given as a Project risk- and [b] one of the risks given as an Internal risk (8 marks)
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