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whether to operate plants only in the United States or also in either Mexico

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Consider a firm that is deciding whether to operate plants only in the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If Congress passes OINC in 2008, management expects to do well if it is operating plants in Mexico and Canada. If OINC does not pass in 2008 and the firm does operate plants in Mexico and Canada, it will incur rather large losses. It is also possible that Congress will table OINC in 2009 and wait until 2010 to vote on it. The profit payoff matrix (profits in 2008) is shown here;States of nature;OINC passes OINC fails OINC stalls;Operate plants in U.S. only $10 Million -$1 million $2 million;Operate plants in U.S. & Mexico $15 Million -$4 million $1.5 million;Operate plants in U.S., Mex. &Can. $20 million -$6 million $4 million;Assuming the managers of this firm have no idea about the likelihood of congressional action on OINC in 2008, what decision should the firm make using each of the following rules?;a. Maximax rule;b. Maximin rule;c. Minimax regret rule;d. Equal probability rule

 

Paper#21633 | Written in 18-Jul-2015

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