1.B) i. According to Maximin decision criterion, the best result is $300.

The maximin decision criterion dictates that an individual will choose the worst result and then pick
payoff that gives greater benefit.

Demand Level Order Level

Worst payoff (Max) ($100) $300 $100

Best payoff $300

According to the table above, it is evident that the best choice is decision that will give a payoff of $300.
Therefore, level of order at medium with demand level of good or poor will be picked since it has higher
payoff from the picked worst performance. The criterion is usually considered as pessimistic since it
choose the worst payoff.

2.B) ii. According to Maximax, the best payoff is $600, which is high level of order with good demand
level.

According to this decision theory, we can note that it adopts optimistic decision making criterion
considering uncertainty of outcomes. The decision criterion is also referred to as aggressive since it
consider the higher outcomes. For instance, AP fruit seller will consider using $600 payoff in making his
decision considering that it can he will have good demand and high order level.

3. C) iii. According to AP’s payoff table, the decision that minimize the opportunity loss in order at
medium level.

The decision theory of minimax aims at reducing the maximum regret which is also termed as
opportunity loss. Therefore, decision making picks a decision that will reduce opportunity loss. The table
below shows the process of preparing minimax regret table;

Demand Level Order Level

High Medium Low
Good 0 300 (600-300) 500 (600-100)
Average 200 (400-200) 0 (400-400) 300 ( 400-100)
Poor 400 (400- (-100)) 0 (300-300) 100 (300-200)

According to the table above, AP maximum regret for fruits orders for the three demand level is as
shown below;

High level- $400

Medium Level- $300

Lowe Level- $500

Therefore, medium minimizes the maximum regret that AP will make when making in deciding on order
level.

4. C) i. Risk neutral usually balances risk and outcome of a decision. They can take too much risk but just
moderate.

According to expected values, the decision makers usually considers the measure of outcome dispersion
and probability of diverse course of action. The expected values are long-term mean of outcome that
are used in decision making. However, the analyst should not use this values only to make a decision.
Therefore, risk neutral in terms of expected value choose to stick with an action with higher return but
with moderate risk.

5. C) ii. The risk attitude determines investor or decision maker appetite for risk and return. The two risk
attitude includes risk averse and risk seekers.

According to risk attitude theories, the risk averse individual will dwell more on extent of risk on a
certain decision and seeks to avoid it. Therefore, the decision makers always pick a decision that will
have lower risk chances and are termed as pessimists. On the other hand, risk seekers always are more
concerned with the return as compared to risk. Therefore, they are directly opposite of risk averse
individuals and are termed as optimistic. This category of individuals will always choose an action that
promises a higher return without considering the level of risk involved.

6. D) i. The expected receipt from RX customers throughout the period is $474,162.50.

The trade receivable at end of the year is as shown below;

Trade receivables = ($492750/36) x60

= $81000

Bad debts = (Total credit sale- Total receivables)*proportion of expected bad debts.
= ($492750 – $81000) x5%
= $20587.50
Therefore cash collected is

Cash collected in the year = $492750 + $83000-$20587.50-$81000

= $474162.50

7 D) ii. The management of debts in an organization is a very crucial role that requires firms to take keen look to
avoid losses by forgetting to record or accumulating too much debt.

The company has various ways of reducing possibility of high bad debts and are listed as follows;

-The customers should be subjected to credit rating check before supplying them with goods or service
in credit.
-The review of existing customer credit rating to determine whether the client has changed or not. It
reduces instance where an existing customer takes more than they can recover in sales and thus
defaulting.

-The company should make sure that debt collection procedures or guidelines are efficient and know to
both parties.

-The firm should also ensure that the credit limit of customers are set and not exceeded since other
client might be tempted to take more than what they can be able to pay.

-Lastly, the company can bring incentive that motivates those who pays within time or penalty for those
who delays payment.

8 E) The major difference is that the bank deposit interest rate are not fixed while that of government
bond is fixed.

The comparison will be possible given that interest rate are determined in annual terms.

Bank deposit interest = (1.011)4 - 1= 0.0447 or 4.47%

Bond interest = 2.5*2 = 5%

Therefore, bond has relatively higher return as compared to bank deposit.

Despite bond merit of fixed interest rate, the instrument lacks flexibility since has lower market liquidity
as compared to bank deposit. However, the bank deposit has a higher risk since interest rates are not
fixed and banks might fail and thus default on payment. The failure of banks in 2007/2008 financial crisis
was a wake up for Federal Reserve to introduce liquidity risk management in banks to protect
depositors.

9 F) According to the information provided, it is evident that the working capital cycle is 68.7 days.

Details Computations Number of days

Raw Material inventory days (85/915)*365days 33.9

Finished goods inventory days (90/1215)*365days 27

Receivable days {185/ (0.8*1400)}*365days 60.3

Payables days {125/ (0.95*915)}*365days -52.5

Net working capital cycle 68.7