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You are a bank manager. Ranga has approached your bank for a million dollar loan

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You are a bank manager. Ranga has approached your bank for a million dollar loan. The bank can charge 10% interest from Ranga for this loan. The bank will buy government bonds at 4% interest rate in case Ranga's application is rejected. You think there is 10% chance that Ranga would default on his loan based on your knowledge about Ranga. At a cost of about $1000, the bank can investigate and figure out Ranga's complete credit history.;Based on the past performance, you know that the credit reports give a favorable credit rating 80% of the time when the customer honors loan commitments, and unfavorable credit rating 20% of the time even when the customer honors loan commitments. The credit reports give a favorable credit rating 25% of the time and an unfavorable credit rating 75% of the time when the customer does not honor loan commitments.;Draw the decision Tree and Derive Optimal decision;Compute Expected Value of Perfect Information;Compute expected Value of Sample Information

 

Paper#32979 | Written in 18-Jul-2015

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