1. The Oahu Trading Company is considering the purchase of a small firm that produces clocks. Oahu’s management feels th

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1. The Oahu Trading Company is considering the purchase of asmall firm that produces clocks. Oahu’s management feels there is a50–50 chance, if Oahu buys the firm, that it can mold the firm intoan effective producer of washing machine parts. If the firm can betransformed in this way, Oahu believes that it will make $500,000if it buys the firm; if it cannot be transformed in this way, Oahubelieves that it will lose $400,000.
a. Construct a decision tree to represent Oahu’s problem
b. What are the decision forks? (Are there more than one?)
c. What are the chance forks? (Are there more than one?)
d. Use the decision tree to solve Oahu’s problem. In otherwords, assuming that the firm wants to maximize the expectedprofit, should Oahu buy the firm?
e. Before Oahu makes a decision concerning the purchase of thefirm, Oahu’s president learns that if the clock producer cannot bemade into an effective producer of washing machine parts, there isa 0.2 probability that it can be resold to a Saudi Arabiansyndicate at a profit of $100,000. (If the firm cannot be resold,Oahu will lose $400,000.) (1) Does this information alterthe decision tree? (2) Can you think of threemutually exclusive outcomes if Oahu buys the firm? (3) What is the probability ofeach of these outcomes? (4) What is the monetary value toOahu of each of these outcomes?
f. Use your results in part (e) to solve Oahu’s problem underthis new set of conditions. In other words, on the basis of thisnew information, should Oahu buy the firm?
(PART G) Oahu’s executive vice president discovers an error inthe estimate of how much Oahu will gain if it buys the clockmanufacturer and turns it into an effective producer of washingmachine parts.