Term Project - Case Study“AL-MAZRAA Company”

PhD Candidate: Azdeen Najah Asst.Prof.Dr. Altan Ozkil

ATILIM UNIVERSIYMODES-654 Decision Making Analysis

Contents: Problem DefinitionElements of Decısıon ProblemsoValues and ObjectivesoUncertain EventsoConsequencesoDecisions

Problem Decision TreeProbability Estimation of Decision TreePossible StrategiesRisk and Cumulative Risk ProfileSensitivity AnalysisMaking Choice (Result)

Problem Definition:AL-MAZRAA company insisting to invest amount of money during one year, The company have three investment opportunities:

Growth

50%Re-

cessıon

30%

In-flatıon

20%

Expected Ecconomical Situationfor The next Year

The expected company profits for each activity and situation

New BeveragesFactory

Buy Shares in Libyan NOC

Saving Money in Bank

ExpectedEcconomical

Situation

Political situation “Oil port crisis”Oil ports Crisis to

be continuedOil ports Crisis to

be solvedOil ports Crisis will become more worse

Grouth 0.53 0.64 0.562

Recessıon 0.29 0.29 0.279

Inflatıon 0.18 0.07 0.159

AL-MAZRAA Co. Objectives:•To invest amount of money during one year and widening the company activities•To get the maximum possible profits•To improve the image of company in the local market•Participation as private sector in rebuilding efforts after the civil war

Uncertain Events:

Otherwise, we have other uncertainty related to the political situation and the oil port crisis during the next year:The Oil ports Crisis to be continued.Or, the Oil ports Crisis to be solved.Or, the Oil ports Crisis will become worse Uncertainty

ReasonNew Beverage

FactoryBuy Shares in Libyan NOC

Saving Money in Bank

Economical √ √ √ √ √ √ X X XPolitical X X X √ √ √ X X X

In this case we will face uncertainties according to the political situation and the economical situation, The economical situation in the country during the next year will be:Growth or,Recession or,Inflation?

Consequences:

Immediate

Decision

Second

Decision

Final

Decision

Resolved before second decision

Resolved before final decision

Resolved before last decision

What are the outcomes of each alternative?

At each economical and/or political situation?

Which alternative to be choiced?

New Beverages Factory, Buy Shares or Saving money in Bank

Cosequences

Time LineNow Planning Horizons

Planning Horizon = Time when decision maker finds out the results

Problem Decision Tree

Save in Bank 3.00 $ Million

Oil Ports Crisis Continued (0.30)

Oil Ports Crisis Solved

(0.50)

Oil Ports Crisis More Worse (0.20)

(0.53) Growth 3.60 $ Million

(0.29) Recession 2.40 $ Million

(0.18) Inflation 2.10 $ Million

(0.64) Growth 7.50 $ Million

(0.29) Recession 3.00 $ Million

(0.07) Inflation -0.60 $ Million (0.562) Growth 5.040 $ Million

(0.279) Recession 2.55 $ Million

(0.159) Inflation 1.95 $ Million

(0.45) Growth 6.50 $ Million

(0.18) Recession 3.00 $ Million

(0.37) Inflation - 1.00 $ Million

New beverage Factory

Probability Estimation of Decision Tree:Probability Calculus: Law of Total Probability

Pr(C) Pr(S) Pr(W)0.30 0.50 0.20

Outcome Pr(Outcome|C) Outcome Pr(Outcome|S) Outcome Pr(Outcome|W)G 0.53 G 0.64 G 0.562R 0.29 R 0.29 R 0.279I 0.18 I 0.07 I 0.159

Pr(G) = Pr(G | C) Pr(C) + Pr(G | S) Pr(S) + Pr(G| W) Pr(W) = 0.53*0.30 + 0.64*0.50 + 0.562*0.20= 0.5914

Pr(R) = Pr(R | C) Pr(C) + Pr(R | S) Pr(S) + Pr(R| W) Pr(W) = 0.29*0.30 + 0.29*0.50 + 0.279*0.20= 0.2878

Pr(I) = Pr(I | C) Pr(C) + Pr(I | S) Pr(S) + Pr(I| W) Pr(W) = 0.18*0.30 + 0.07*0.50 + 0.159*0.20= 0.1208

Growth (0.53*0.30 + 0.64*0.50 + 0.562*0.20= 0.5914)

Recession (0.29*0.30 + 0.29*0.50 + 0.279*0.20= 0.2878)

Inflation (0.18*0.30 + 0.07*0.50 + 0.159*0.20= 0.1208)

When we apply LOTP we are

collapsing probability Tree

Probability Estimation of Decision Tree:Probability Calculus: Bayes Theorem

Pr(C) Pr(S) Pr(W) 0,30 0,50 0,20 X Pr(X|C) Pr(X|S) Pr(X|W) Pr(X ÇC) Pr(X ÇS) Pr(X

ÇW)Pr(X) Pr(C|X) Pr(S|X) Pr(W|X) Check

G 0,53 0,64 0,562 0,159 0,320 0,112 0,300 0,269 0,541 0,190 1,000R 0,29 0,29 0,279 0,087 0,145 0,056 0,500 0,302 0,504 0,194 1,000I 0,18 0,07 0,159 0,054 0,035 0,032 0,200 0,447 0,290 0,263 1,000

Check 1,00 1,00 1,00 0,300 0,500 0,200 1,000

Growth

(0.3)

Recession

(0.5)

Inflation

(0.2)

(0.269) Oil Ports Crisis Continued 3.60 $ Million

(0.541) Oil Ports Crisis Solved 2.40 $ Million

(0.190) Oil Ports Crisis More Worse 2.10 $ Million

(0.302) Oil Ports Crisis Continued 7.50 $ Million

(0.504) Oil Ports Crisis Solved 3.00 $ Million

(0.194) Oil Ports Crisis More Worse -0.60 $ Million

(0.447) Oil Ports Crisis Continued 5.040 $ Million

(0.290) Oil Ports Crisis Solved 2.55 $ Million

(0.263) Oil Ports Crisis More Worse 1.95 $ Million

AL-MAZRAA Co. ProblemAfter Bayes Theorem

New beverage Factory

Save in Bank 3.00 $ Million

(0.53) Growth 3.60 $ Million

(0.29) Recession 2.40 $ Million

(0.18) Inflation 2.10 $ Million

(0.64) Growth 7.50 $ Million

(0.29) Recession 3.00 $ Million

(0.07) Inflation -0.60 $ Million (0.562) Growth 5.040 $ Million

(0.279) Recession 2.55 $ Million

(0.159) Inflation 1.95 $ Million

(0.45) Growth 6.50 $ Million

(0.18) Recession 3.00 $ Million

(0.37) Inflation - 1.00 $ Million

1st. Strategy2nd. Strategy3dh. Strategy

Possible Strategies

Oil Ports Crisis Continued (0.30)

Oil Ports Crisis More Worse (0.20)

Oil Ports Crisis Solved

(0.50)

Risk and Cumulative Risk Profile:Risk Profile for 1st. strategy: “New Beverages Factory”

Risk Profile for 2nd. strategy: “Buy Chares in Libyan Oil Co.”

Risk Profile for 3rd. strategy: “Saving money in Bank”

Risk and Cumulative Risk Profile

Analysis of Profit ObjectiveEMV (Strategy 1) =0.45 * 6.50 + 0.18 * 3.00 + 0.37 (-1.00) = 3.09 $MillionEMV (Strategy 2)=0.30[ 0.53{ (3.60) + 0.290 (2.40) + 0.180 (2.10) } ] + 0.50 [0.64 { (7.50) + 0.290 (3) + 0.0.07 (-0.60) }] +0.20[ 0.562 (5.04) + {0.279 (2.55) + 0.159 (1.95) }]= 0.3* 2.982 + 0.50 * 5.628 + 0.20 * 3.85 = 3.29 $MillionEMV (Strategy 3) = 2.65 MillionD= Max.{ 3.09 $Million, 3.29 $Million, 2.65 $Million} = 3.29 $Million

Conclusion:• Buy Shares is preferred Over New Beverages Factory and Saving money in Bank• CRP’s cross. Hence,No Stochastic Dominance

Sensitivity Analysis:Two-Way Sensitivity Analysis: “AL-MAZRAA Co.”EMV(A) > EMV(B) ↔ 0.38 – 0.39 q > p → (1)EMV(A) > EMV(C) ↔ 0.49 – 0.53 q > p → (2)EMV(B) > EMV(C) ↔ 0.72 – 0.84 q > p → (3)

The shaded area in the figure represents those points for which p > 0.45 and q > 0.40.• Note that all of these points fall in the “Choose B” region.• Thus, chaireman of AL-MAZRAA Co. Should adopt strategy B : Buy Shares in Libyan NOC

Making Choice (Result):After studying all decision Problem sides and elements of Decision Problem, objectives, uncertain events, consequences, and drawing problem decision tree, estimating the probability of decision tree, the possible Strategies, the risk and cumulative risk profile and finally the sensitivity analysis, we strongly reccommending AL-MAZRAA Co. To apopt the strategy B (Buy Shares in Libyan NOC) as preferred alternative.

End Of Presentation

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