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Abstract:
In this paper, we argue that, in a deregulated world, the most important challenge facing firms is to understand and appropriately model the price dynamics they face. Models of the price-dynamics process are the basis for computing the value of contracts, investments, or assets under uncertainty and for optimizing operating decisions. Recent research suggests that an excellent way to value assets and contracts in deregulated electricity markets is to view them as a series of real options (Deng, Johnson, Sogomonian, 1998; Hsu, 1998; Pilipovic, 1998). For example, a power plant represents the right, but not the obligation, to turn fuel into electricity every hour - a real option. Another example would be a transmission line, which can be viewed as a call option on the basis spread in electricity prices. All valuation exercises rely on understanding the dynamics of prices, which is the focus of this paper.

Abstract:
We have all created options. We create a simple option when we make a nonrefundable deposit to hold a hotel room for the first night of a four-night ski vacation or to save a seat in the entering class of a college. Did our option premium give us good value? That depends on the chances that we would actually exercise the option to stay in the hotel, how much we would value the room, and how we value the alternative scenario where we don't have the room. What about much more complicated real (as distinct from market-traded financial) business options? The option structure and the unfolding of uncertainty would be more involved, yet the valuation would follow similar thinking. This note discusses how to use decision trees and Monte Carlo simulations to structure the analysis of option decisions and to value them. The note starts with simple examples and moves on to very rich examples, limited only by students' ability to model the underlying uncertainties and clarify the nature of the option. Part of the challenge is to anticipate how the future exercise of an option would be triggered. Regression helps identify triggering variables or functions. By the end of the note, students will have developed generally applicable tools for widely ranging real options using accessible methodology.

quantitative analysis, option valuation, Monte Carlo simulation, valuation, decision trees

Abstract:
We have all created options. We create a simple option when we make a nonrefundable deposit to hold a hotel room for the first night of a four-night ski vacation or to save a seat in the entering class of a college. Did our option premium give us good value? That depends on the chances that we would actually exercise the option to stay in the hotel, how much we would value the room, and how we value the alternative scenario where we don't have the room. What about much more complicated real (as distinct from market-traded financial) business options? The option structure and the unfolding of uncertainty would be more involved, yet the valuation would follow similar thinking. This note discusses how to use decision trees and Monte Carlo simulations to structure the analysis of option decisions and to value them. The note starts with simple examples and moves on to very rich examples, limited only by students' ability to model the underlying uncertainties and clarify the nature of the option. Part of the challenge is to anticipate how the future exercise of an option would be triggered. Regression helps identify triggering variables or functions. By the end of the note, students will have developed generally applicable tools for widely ranging real options using accessible methodology.

quantitative analysis, option valuation, Monte Carlo simulation, valuation, decision trees

Abstract:
This case builds on the case "Merck & Company: Product KL-798" (UVA-QA-0582) by providing market uncertainties for the drug (drug quality, the presence of a competitor, market growth, and the time to the drug's release). Details and spreadsheets are provided for the calculation of net present values for the scenarios. There is an additional challenge of how to treat the several downstream decisions (using OptQuest, for example) and how to value the license opportunity.

operations, decision analysis, Monte Carlo simulation

Abstract:
This case builds on the case "Merck & Company: Product KL-798" (UVA-QA-0582) by providing market uncertainties for the drug (drug quality, the presence of a competitor, market growth, and the time to the drug's release). Details and spreadsheets are provided for the calculation of net present values for the scenarios. There is an additional challenge of how to treat the several downstream decisions (using OptQuest, for example) and how to value the license opportunity.

operations, decision analysis, Monte Carlo simulation

Abstract:
In March 1997, an executive vice president of Genzyme Corporation must develop the terms by which the $518 billion (revenue) firm will form a joint venture with a small biotechnology firm to make and market a new drug. The tasks for the decision-maker are to estimate the enterprise value of the new joint venture and to recommend how large an interest to acquire in the venture, and to determine what price to pay for that interest, and when. The case may be used to pursue some or all of the following objectives: (1) exercising analytical techniques, (2) introducing a framework for creating value and reducing risk, (3) exploring the impact on value of a hidden option (staged investing), and (4) visualizing risk and its implications.

joint ventures, Monte Carlo simulation, research and development, risk analysis, valuation

Abstract:
In March 1997, an executive vice president of Genzyme Corporation must develop the terms by which the $518 billion (revenue) firm will form a joint venture with a small biotechnology firm to make and market a new drug. The tasks for the decision-maker are to estimate the enterprise value of the new joint venture and to recommend how large an interest to acquire in the venture, and to determine what price to pay for that interest, and when. The case may be used to pursue some or all of the following objectives: (1) exercising analytical techniques, (2) introducing a framework for creating value and reducing risk, (3) exploring the impact on value of a hidden option (staged investing), and (4) visualizing risk and its implications.

joint ventures, Monte Carlo simulation, research and development, risk analysis, valuation

Abstract:
This note teaches the student how to account for seasonality in time-series data. All the necessary steps to (1) deseasonalize, (2) forecast with deseasonalized data, and then (3) reseasonalize the forecast are illustrated with examples from the coal industry.

forecasting, statistics, time series

Abstract:
This note teaches the student how to account for seasonality in time-series data. All the necessary steps to (1) deseasonalize, (2) forecast with deseasonalized data, and then (3) reseasonalize the forecast are illustrated with examples from the coal industry.

forecasting, statistics, time series

Abstract:
This introduction to methods for treating risk illustrates the assessment and use of a utility function and gives simplified techniques for typical forms of risk aversion. Some associated risk-preference exercises (QA-0253) can be used with the note.

decision theory, management-decision models, risk analysis, risk management

Abstract:
This case describes new options on weather derivatives from Enron, in particular, floors, swaps, and caps on heating-degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt-hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it. See also the A case (UVA-F-1299).

hedging, option pricing, risk analysis, risk management, simulation

Abstract:
The concept of exposure, or uncertainty that matters, is developed as the target of hedging. Then, how to hedge that exposure - in particular, how to use regression analysis to obtain a hedging ratio - is described. The note concludes with a discussion of hedging multiple uncertainties and how to use correlations in developing a hedging strategy.

hedging, risk analysis, risk management

Abstract:
This technical note introduces (1) approaches to forecasting in general, (2) simple moving averages and exponential smoothing, (3) accounting for seasonality in forecasting, (4) accounting for trend in forecasting, and (5) implementing a forecasting model. Holt and Winter models for exponential smoothing are included.

data analysis, forecasting, regression analysis, time series

Abstract:
This technical note introduces (1) approaches to forecasting in general, (2) simple moving averages and exponential smoothing, (3) accounting for seasonality in forecasting, (4) accounting for trend in forecasting, and (5) implementing a forecasting model. Holt and Winter models for exponential smoothing are included.

data analysis, forecasting, regression analysis, time series

Abstract:
Teachers of management science or quantitative methods in schools of business probably recognize the above passage as the beginning of a description of one of our discipline's favorite problems?the newsvendor problem. Known by many names....newsboy, Christmas tree, and single-period inventory....this problem can be found in almost every introductory management science or quantitative methods textbook and is utilized regularly in our research (see Casimir 1999, Lau and Lau 1997, and Lippman and McCardle 1997). To complete the problem description, we would expect to find a probabilistic forecast of daily demand for Farm Grown's product, and the question posed as to how many cases Farm Grown should purchase at the start of the day.

Abstract:
This technical note considers three activities that are key to creating value for the organization: (1) making excellent choices, (2) actually bringing about change, and (3) operating effectively with new choices. The note recommends a process that involves lacing together a decision board and a project team as they work together through six work steps. The process focuses on alternative generation, evaluation, and implementation, and is grounded in decision analysis. Tools for creativity enhancement and structuring of analysis are crucial to success; much of this note is about creativity. Collaborative efforts to frame the assessment of risk and make explicit value trade-offs are integral to the process. Risk-management techniques expand the set of alternatives to add value and reduce risk. Companies and consultants have used this process very successfully.

decision analysis, change, management of, risk management

Abstract:
The manager of a large downtown hotel has to decide whether to accept 60 additional reservations. If she accepts, she will be overbooked and face certain costs if all the people holding reservations show up. The manager must forecast, based on historical data, how many of the people holding reservations will show up and then decide, after taking into account the cost involved, whether to accept the additional bookings. This case can be used in a class on seasonality and exponential smoothing in time-series forecasting.

decision theory, forecasting, diverse protagonist, female, diversity case, service industries, management of, time series, diversity

Abstract:
The manager of a large downtown hotel has to decide whether to accept 60 additional reservations. If she accepts, she will be overbooked and face certain costs if all the people holding reservations show up. The manager must forecast, based on historical data, how many of the people holding reservations will show up and then decide, after taking into account the cost involved, whether to accept the additional bookings. This case can be used in a class on seasonality and exponential smoothing in time-series forecasting.

decision theory, forecasting, diverse protagonist, female, diversity case, service industries, management of, time series, diversity

Abstract:
The president of a natural-resources exploration company has to decide whether to invest in a new drilling opportunity. He already has a Lotus spreadsheet that projects the most likely scenario for the well and calculates the NPV and internal rate of return. However, the president and another potential investor discuss six uncertainties. He also has prepared a spreadsheet for a couple of downside scenarios--one where gas is not able to be produced after the well is drilled and a second where gas is produced but all other uncertainties are at their 1% worst possible values. A student worksheet file is available for use with this case. See also "Sprigg Lane (B)" (UVA-F-0804), which introduces the use of Black-Scholes to treat a capital-budgeting decision as an option in the context of whether to drill a gas well.

capital investment, decision theory, forecasting, Monte Carlo simulation, scenarios

Abstract:
The president of a natural-resources exploration company has to decide whether to invest in a new drilling opportunity. He already has a Lotus spreadsheet that projects the most likely scenario for the well and calculates the NPV and internal rate of return. However, the president and another potential investor discuss six uncertainties. He also has prepared a spreadsheet for a couple of downside scenarios--one where gas is not able to be produced after the well is drilled and a second where gas is produced but all other uncertainties are at their 1% worst possible values. A student worksheet file is available for use with this case. See also "Sprigg Lane (B)" (UVA-F-0804), which introduces the use of Black-Scholes to treat a capital-budgeting decision as an option in the context of whether to drill a gas well.

capital investment, decision theory, forecasting, Monte Carlo simulation, scenarios

Abstract:
A credit-card company must value portfolios of customers based on their future earnings. The payment characteristics of customers serve to classify them into states. This case can be the basis for discussing state dynamics over time in a Markov process. Students can gain an understanding of how portfolios that look good in the present may not be favorable in the long term, and how to find and use steady-state probabilities. Students can also see how changing transition probabilities affect steady-state distributions.

banking, financial services

Abstract:
The Crystal Ball add-in to Excel for Monte Carlo simulations has capabilities to correlate assumptions (uncertain quantities). This note describes the various ways that correlations may be used, and issues a number of caveats.

Monte Carlo simulation, simulation

Abstract:
In the B case, the initial results from a Monte Carlo simulation seem to conflict with the critical-fractile result obtained earlier. The manager must figure out why and then make a decision. See also the A case (UVA-QA-0339).

decision theory, diverse protagonist, female, Monte Carlo simulation, probability, service industries, management of, simulation, diversity

Abstract:
In the B case, the initial results from a Monte Carlo simulation seem to conflict with the critical-fractile result obtained earlier. The manager must figure out why and then make a decision. See also the A case (UVA-QA-0339).

decision theory, diverse protagonist, female, Monte Carlo simulation, probability, service industries, management of, simulation, diversity

Abstract:
This note describes the use of the OptQuest tool for optimal-decision-variable searches based on Crystal Ball Monte Carlo simulations. Setup of the objectives and constraints, selecting run options, saving results, and a simple example are all included.

decision analysis, Monte Carlo simulation

Abstract:
An electric utility faces the hard choice between losing its third-largest customer and building a cogeneration plant that is very risky and appears to take value away from the firm. Students must first assess the utility's strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted-cash-flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable.

capital budgeting, project finance, simulation

Abstract:
An electric utility faces the hard choice between losing its third-largest customer and building a cogeneration plant that is very risky and appears to take value away from the firm. Students must first assess the utility's strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted-cash-flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable.

capital budgeting, project finance, simulation

Abstract:
An angel/venture capitalist could invest in an Internetsheet-music publishing start-up. The chance of success multiplied by the value, if successful, suggests that this isn't a good investment. Nevertheless, several friends suggest the optionality present in the venture: abort an unsuccessful Web site and sell the technology; switch the technology if the Web site is good, expand, buyout. Decision trees and Monte Carlo simulations are used to value these options, which make the opportunity look very attractive.

option valuation, simulation, valuation, decision trees

Abstract:
An angel/venture capitalist could invest in an Internetsheet-music publishing start-up. The chance of success multiplied by the value, if successful, suggests that this isn't a good investment. Nevertheless, several friends suggest the optionality present in the venture: abort an unsuccessful Web site and sell the technology; switch the technology if the Web site is good, expand, buyout. Decision trees and Monte Carlo simulations are used to value these options, which make the opportunity look very attractive.

option valuation, simulation, valuation, decision trees

Abstract:
This case provides an explanation of a Lotus worksheet built to implement exponential smoothing for the data in "Wachovia Bank and Trust Company, N.A. (B): Piedmont Operations Center Scheduling" (UVA-OM-0664).

bank management, cost analysis, decision theory, forecasting, scheduling, service operations, management of

Abstract:
This case provides an explanation of a Lotus worksheet built to implement exponential smoothing for the data in "Wachovia Bank and Trust Company, N.A. (B): Piedmont Operations Center Scheduling" (UVA-OM-0664).

bank management, cost analysis, decision theory, forecasting, scheduling, service operations, management of

Abstract:
A farmer who can lock in the prices of his product wants to know how much, if any, of the production should be hedged. This case examines how the answer is affected by such factors as the certainty of how much will be produced, the relationship between prices and production, and the risk aversion of the farmer. The case affords an analysis of how hedging policies should change, reflecting the different behavior of the variables that affect the results.

hedging, risk management, risk profile

Abstract:
The president of a well-established manufacturer of mattresses has asked his assistant to recommend whether or not to consolidate three plants. He must decide not only which criteria are most useful in making the decision, but also how to weigh the different criteria in arriving at the decision.

decision analysis, multi-objective decision making, planning

Abstract:
The president of a well-established manufacturer of mattresses has asked his assistant to recommend whether or not to consolidate three plants. He must decide not only which criteria are most useful in making the decision, but also how to weigh the different criteria in arriving at the decision.

decision analysis, multi-objective decision making, planning

Abstract:
This technical note considers how one makes choices in situations where there are multiple objectives and attributes that measure performance against these objectives. In some instances, given attributes may be important because they measure impacts of a choice on specific stakeholders. The note considers elimination of alternatives by aspects, dominance, and some decision rules that do not require compensatory trade-offs (lexicographic, satisficing). Methods for "rate and weight" (linear additive scoring rules) are described and illustrated.

decision analysis, multi-objective decision making, performance measurement, quantitative analysis, general

Abstract:
This technical note considers how one makes choices in situations where there are multiple objectives and attributes that measure performance against these objectives. In some instances, given attributes may be important because they measure impacts of a choice on specific stakeholders. The note considers elimination of alternatives by aspects, dominance, and some decision rules that do not require compensatory trade-offs (lexicographic, satisficing). Methods for "rate and weight" (linear additive scoring rules) are described and illustrated.

decision analysis, multi-objective decision making, performance measurement, quantitative analysis, general

Abstract:
A consultant is hired by an organization of magazine publishers to make recommendations for an improved procedure for deciding how many Good Housekeeping magazines to print each month. She has historical data available for the past nine years and must find the best method of forecasting (deseasonalizing data, exponential smoothing, reseasonalizing) and then use the appropriate costs of under- and overproducing to decide how many magazines to print. See also the B case (UVA-QA-0397).

decision theory, forecasting, diverse protagonist, female, sales forecasting, diversity case, strategic planning, diversity

Abstract:
An account executive has the task of calculating a beta value for three stocks of interest to an important client, based on five years of monthly total returns. The client is interested in these beta values as measures of the riskiness of the three investments. This case is best used near the beginning of a module on regression. It focuses on the simple linear regression model relating equity returns to market returns. This use of regression (to calculate a stock's beta) is very common in financial analyses and will be seen by the students in other courses. The case serves to clarify the distinction between systematic and unsystematic risk and between R-squared and the standard deviation of residuals as measures of forecasting uncertainty.

diverse protagonist, female, portfolio management, regression analysis, risk analysis, security analysis, diversity case, statistics, diversity

Abstract:
This case series brings together the evaluation of operating options and financial hedging. An electric power plant has several hourly operating alternatives, and a decision model is used to evaluate profit opportunities and decide among those options for fuel and operating level given the available capacity, which is in itself uncertain. The decision tree for these operating decisions is embedded in a Monte Carlo simulation that evaluates hedges of electricity, natural gas, and fuel oil, given uncertain prices.

hedging, Monte Carlo simulation, operations management, pricing, decision trees

Abstract:
This supplement to "Ponca City Cogeneration Plant" (UVA-QA-0469) provides information on the various factors that contribute to the risk of the project. An electric utility faces the hard choice between losing its third-largest customer and building a cogeneration plant that is very risky and appears to take value away from the firm. Students must first assess the utility's strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted-cash-flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable.

capital budgeting, project finance, simulation

Abstract:
This supplement to "Ponca City Cogeneration Plant" (UVA-QA-0469) provides information on the various factors that contribute to the risk of the project. An electric utility faces the hard choice between losing its third-largest customer and building a cogeneration plant that is very risky and appears to take value away from the firm. Students must first assess the utility's strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted-cash-flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable.

capital budgeting, project finance, simulation

Abstract:
A real-estate broker wishes to develop a model to be used by a sophisticated buyer to analyze the financial characteristics of a large estate. This case raises several issues, including risk in long-term investments, selection of a time horizon, determination of a salvage value, and general modeling choices.

decision theory, management-decision models, project finance, real estate valuation, simulation

Abstract:
A real-estate broker wishes to develop a model to be used by a sophisticated buyer to analyze the financial characteristics of a large estate. This case raises several issues, including risk in long-term investments, selection of a time horizon, determination of a salvage value, and general modeling choices.

decision theory, management-decision models, project finance, real estate valuation, simulation

Abstract:
This case considers the EPA's bubble policy, which allows pollution to be managed on a plantwide basis rather than stack-by-stack. A pollution constraint is added to a linear-programming model that may be used to plan production and the control of pollution.

business and society, corporate strategy, environmental issues, pollution, production planning

Abstract:
This case considers the EPA's bubble policy, which allows pollution to be managed on a plantwide basis rather than stack-by-stack. A pollution constraint is added to a linear-programming model that may be used to plan production and the control of pollution.

business and society, corporate strategy, environmental issues, pollution, production planning

Abstract:
New options on weather from Enron are described, in particular floors, swaps, and caps on heating degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it.

hedging, option pricing, risk analysis, risk management, simulation

Abstract:
New options on weather from Enron are described, in particular floors, swaps, and caps on heating degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it.

hedging, option pricing, risk analysis, risk management, simulation

Abstract:
A summer MBA consultant prepares a spreadsheet and analysis that the president of the client firm deems flawed. This case asks students to draw an influence diagram for the consultant's spreadsheet that will reveal the inadequacy and set the stage for determining how to correct the analysis. See also the unabridged version (UVA-QA-0497).

influence diagrams, structuring, spreadsheet modeling

Abstract:
Set in 1999, this case allows students to put themselves in the positions of both Airbus and Boeing as Boeing considered how to respond to Airbus's decision to announce its plans to proceed or not with the $10 billion development of the world's first commercial superjumbo jet, the Airbus A3XX. Boeing was considering a development effort to "stretch" its 747 jumbo jet into a larger superjumbo version, the 747-X. At the time, the two companies' widely available 20-year forecasts for jumbo- and superjumbo-jet demand were particularly divergent. In light of this very public "agreement to disagree," Boeing could pursue several alternatives, all of which were related to Airbus’s decision about whether or not to develop the A3XX. This case presents an opportunity for students to make a real downstream decision. It was prepared as a final exam for an introductory decision analysis course involving subjective probability assessment, decision tree modeling, simulation, real options, and game theory. In the analysis of this case, a student is expected to utilize ideas from all five of these areas.

game theory, simulation, decision trees

Abstract:
This comprehensive technical note explains linear regression. It is indended for students with no prior knowlede of the topic. It is devided into nine sections, which may be assigned separately: 1. The simple linear model, 2. Fitting the model using least squares, 3. Important properties of the least-squares regression line, 4. Summary regression statistics, 5. Assumptions behind the linear model, 6. Model-building philosopy, 7. Forecasting using the linear model, 8. Using dummy variables to represent categorical variables, and 9. Useful data transformations. The sections correspond to stand-alone notes also available through Darden Business Publishing.

data analysis, regression analysis, statistical analysis

Abstract:
A plant manager must decide which contracts to take for his casting-press operation and the price to bid on a new General Motors water pump. In the process, jobs must be scheduled in regular time, overtime, and outsourcing, and the plant manager must consider uncertainty in volumes, costs, and available uptime hours, as well as the uncertainty about winning the contract bid, which depends on price. Two student worksheet files are available for use with this case.

capacity planning, pricing

Abstract:
The manager of a paper plant must decide whether to buy a new electrode boiler to replace a natural gas boiler. The challenge is to cut through complexities such as uncertainty in boiler efficiency, energy prices, financing alternatives, and supplier/competitor relationships to arrive at a first-cut analysis and decision. While the case is rich with issues, a considered decision can be made without using the sophisticated methods available to treat these complexities. The case is designed as an introductory class in which an agenda for a course in decision analysis/management science is established.

decision analysis

Abstract:
The manager of a paper plant must decide whether to buy a new electrode boiler to replace a natural gas boiler. The challenge is to cut through complexities such as uncertainty in boiler efficiency, energy prices, financing alternatives, and supplier/competitor relationships to arrive at a first-cut analysis and decision. While the case is rich with issues, a considered decision can be made without using the sophisticated methods available to treat these complexities. The case is designed as an introductory class in which an agenda for a course in decision analysis/management science is established.

decision analysis

Abstract:
In the B case, the consultant looks at historical data for five consumer magazines (Health, Better Homes and Gardens, Working Woman, Country Living, and True Story). For each one, she tries to determine the best method of forecasting circulation that also makes sense in light of external factors. See also the A case (UVA-QA-0396).

forecasting, diverse protagonist, female, sales forecasting, diversity case, strategic planning, diversity

Abstract:
The owner of a small consulting firm faces conflicting objectives in the choice of an organizational form for his firm. This case focuses on the structuring of objectives and corresponding measures of performance. See also the B case (UVA-QA-0242).

corporate structure, decision theory, management-decision models, organizational design, organizational objectives, performance measurement

Abstract:
The owner of a small consulting firm faces conflicting objectives in the choice of an organizational form for his firm. This case focuses on the structuring of objectives and corresponding measures of performance. See also the B case (UVA-QA-0242).

corporate structure, decision theory, management-decision models, organizational design, organizational objectives, performance measurement

Abstract:
This case can be used with the A case (UVA-QA-0430) to extend the "first-cut" decision analysis into issues of risk management and consideration of options to stop the project.

decision analysis, marketing research, probability, risk management, sensitivity analysis, uncertainty

Abstract:
This case can be used with the A case (UVA-QA-0430) to extend the "first-cut" decision analysis into issues of risk management and consideration of options to stop the project.

decision analysis, marketing research, probability, risk management, sensitivity analysis, uncertainty

Abstract:
The president of a large and established manufacturer of laboratory equipment has to decide whether to invest a million dollars for 30% equity in a start-up company in the field of lab robotics. The agreement would also allow his company the right to market the product. He already has a Lotus spreadsheet that projects the best guess of the future scenario and calculates several measures of performance (ROS, ROE, ROI, NPV, and IRR). He must decide which of the criteria are most useful. A relevant-cost issue that is introduced must be resolved, because it makes a big difference in the NPV. In the supplement some background material is provided for a forecasting/judgmental assessment exercise based on this decision. The supplement could, assuming students have already been introduced to this topic, form the basis for a short workshop (an hour or less) on judgmental probability, or it could be used with a note on cumulative probability distributions for an introductory class on the topic. (The B case is QA-0383, and a supplement to the A case is QA-0384.)

capital budgeting, financial-statement analysis, investment analysis, relevant costs, simulation, valuation

Abstract:
A public offering to complete the privatization of the Argentine phone company is planned. The initial pro form analysis suggests a negative net present value for the offering. The task is to check the assumptions of the firstcut analysis and make more consistent assumptions about Argentine and US inflation about the business performance of the phone company. A risk analysis (using Monte Carlo simulation, for example) is needed to capture the full range of risks and rewards and determine what to bid for the company.

accounting, inflation, bargaining/bidding, inflation, Monte Carlo simulation, risk analysis, valuation, international, diverse protagonist, gender (female protagonist)

Abstract:
The task is to prepare a sealed bid against one opponent for a hotel that has an appraised value and a specific, higher value to our company. We have data about the ratio of bids of the other bidder to appraised value in similar sealed bids. The intent is to dispel many unfounded notions of how to bid and to develop a strategic approach to finding the best bid.

decision analysis, bargaining/bidding, competitive bidding, negotiation

Abstract:
This case describes new options on weather derivatives from Enron, in particular, floors, swaps, and caps on heating-degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt-hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it. See also the A case (UVA-F-1299).

hedging, option pricing, risk analysis, risk management, simulation

Abstract:
The organizers of a music festival may use video from the Friday concert to create a DVD to sell to those who come to the Saturday concert. Attendance on Saturday is uncertain, as is the percentage of those who attend on Saturday who will buy the DVD. Is this a good project? If so, what number of DVDs should be burned early Saturday morning and offered for sale at that evening's performance? By that time, Friday attendance is known, as well as whether it rained on Friday, and there is a forecast for whether it will rain on Saturday. Historical information on these variables may help us predict Saturday attendance using multiple regression; together with the results of a marketing survey, such analysis will help us make better purchasing decisions. This case series (see also the B case, UVA-QA-0708) can be used to illuminate a multitude of concepts that are covered in basic decision-analysis courses. The series starts by examining the role of uncertainty in decision making, proceeds through the estimation of probability distributions from sample data with multiple regression, culminates in the development of a full decision model, and ends with a qualitative and quantitative analysis (with a tornado diagram) of how to add value and reduce risk. Key pitfalls for students are failing to recognize both limits on sales (supply and demand), incomplete reasoning in the determination of the attendance probability distribution, and oversimplifying the full forecast model (i.e., averaging the Saturday rain/no Saturday rain outcomes, rather than incorporating the uncertainty explicitly into the simulation).

decision analysis, regression analysis

Abstract:
A regional director of a consulting firm must decide how to compete for a major consulting contract. Appshop can take a level payment contract, a lower level payment with a prospective bonus given high performance, or bid on an RFP where a significant reward is given contingent on the client's savings. The case can be used to introduce Monte Carlo simulation modeling and to build skills in structuring a decision tree in a spreadsheet. It affords an opportunity to simulate alternative risk profiles and to discuss their comparative advantages.

decision analysis, structuring, software, Monte Carlo simulation, consulting team, risk analysis, decision trees

Abstract:
A farmer is considering selling forward some or all of his corporation. The risk analysis of the hedge is quite different when price and quantity are inversely related, as opposed to independent.

risk management

Abstract:
These three caselets provide practice using risk preference and utility, with both exponential utility (constant risk aversion) and logarithmic utility (decreasing risk aversion). The second caselet is an extension of "Integrated Siting Systems, Inc." (UVA-QA-0441). Students may use TreePlan to conduct a sensitivity analysis of risk tolerance, and can employ Solver to find optimal risk sharing. Students will learn concepts and garner insights regarding portfolio risk in making investments, how intangibles can affect evaluation of risk, and how expected utility can exploit risk sharing.

quantitative analysis

Abstract:
This case is an analysis of GM-Europe's decision process in establishing a production operation in Hungary. The issues addressed include market analysis, foreign-currency requests, government negotiations, and joint-venture partner selection. The case has applications in the teaching of global management, strategic decision making, and market/economy analysis.

foreign investment, international business, international strategy, investment analysis, emerging markets, manufacturing strategy, international case, diversity case, strategic planning, international

Abstract:
The manager of the bank's proof department has to decide how many part-time hours to schedule for the upcoming week. To do this, he must develop a forecast of the number of checks to be processed based on historical data, and then he must take into account the costs of under/overscheduling hours. The case is used to introduce exponential smoothing.

bank management, cost analysis, decision theory, forecasting, scheduling, service operations, management of

Abstract:
This case is an excellent illustration of offline/online integration. Office Depot used its supply chain, systems integration, and existing offline channel strengths to overcome competitive online threats from pure Internet players and other office-products-category players. Students get to consider the critical strategic options for overall strategy, pricing, product line, promotion, and business integration.

business-to-business marketing, competitive dynamics, corporate strategy, distribution channels, growth strategy, market analysis, market planning, market segmentation, marketing strategy, new-market entry, operations strategy

Abstract:
The director of Corporate Research faces the problem of setting the annual budget for the various areas of research. See also UVA-QA-0210 and UVA-QA-0211.

budgeting, decision analysis, decision theory, long-range planning, planning

Abstract:
Microsoft is planning the introduction of Internet Explorer along with Windows 95. Issues include how aggressive the company should be in providing its browser with Windows 95 and restricting OEMs (original-equipment manufacturers) from putting other browsers on their computers. Should Microsoft go for initial share, concentrate on stealing over time, retain customers, or enlarge the total size of the browser market? Students use a Markov process with initial states and switching probabilities to gain insight into resolving these issues.

software, new technology, management of

Abstract:
With the assistance of a temporary graduate student, the director of corporate research uses multiattribute decision analysis to find a plan with greatly improved projected performance (see UVA-QA-0209). The methodology for eliciting probabilities, assessing trade-offs and risk preferences, and finding the most desirable plan is detailed. (A follow-up case, which takes place four years later, is UVA-QA-0211.)

budgeting, decision analysis, decision theory, long-range planning, planning

Abstract:
The organizers of a music festival may use video from the Friday concert to create a DVD to sell to those who come to the Saturday concert. Attendance on Saturday is uncertain, as is the percentage of those who attend on Saturday who will buy the DVD. Is this a good project? If so, what number of DVDs should be burned early Saturday morning and offered for sale at that evening's performance? By that time, Friday attendance is known, as well as whether it rained on Friday, and there is a forecast for whether it will rain on Saturday. Historical information on these variables may help us predict Saturday attendance using multiple regression; together with the results of a marketing survey, such analysis will help us make better purchasing decisions. This case series (see also the A case, UVA-QA-0707) can be used to illuminate a multitude of concepts that are covered in basic decision-analysis courses. The series starts by examining the role of uncertainty in decision making, proceeds through the estimation of probability distributions from sample data with multiple regression, culminates in the development of a full decision model, and ends with a qualitative and quantitative analysis (with a tornado diagram) of how to add value and reduce risk. Key pitfalls for students are failing to recognize both limits on sales (supply and demand), incomplete reasoning in the determination of the attendance probability distribution, and oversimplifying the full forecast model (i.e., averaging the Saturday rain/no Saturday rain outcomes, rather than incorporating the uncertainty explicitly into the simulation).

Abstract:
This case describes a multiattribute decision analysis done for Mr. Taylor (see QA-0241).

corporate structure, decision theory, management-decision models, organizational design, organizational objectives, performance measurement

Abstract:
An investment club must decide how to invest funds jointly when the two members have different risk aversions. The utility of investment taken from the risk/return frontier is evaluated, and additive utility, Nash bargaining, and MaxMin utility are compared.

risk analysis, risk management

Abstract:
A firm with three divisions must decide among many major opportunities to introduce a new product, to upgrade manufacturing machinery, and/or to build a new plant in Canada. Students may use optimization with a financial computer model to help them find a desirable strategic plan.

business planning, capital investment, corporate strategy, linear programming, management-decision models, resource allocation, international case

Abstract:
A division president of a Fortune 50 company must decide whether to initiate an immense capacity expansion. The critical question is whether revenue from the company's major product line will continue to grow rapidly. An opportunity is available to conduct some market research prior to making the decision. This case introduces the steps of decision analysis: decision diagramming, assessing monetary consequences, assigning probabilities, and evaluating expected monetary value to "fold back" the decision tree. The case also develops the ideas of value of information (clairvoyance), control (wizardry), and sensitivity analysis (breakeven probability). (The B case is QA-0431.)

decision analysis, marketing research, probability, risk management, sensitivity analysis, uncertainty

Abstract:
The US General Services Administration (GSA) has 15 years remaining on a lease for a large building. The agency may continue to lease the building, purchase the building now, or purchase the building in 15 years . The B1 case and the other B cases (B2 [QA-0487], B3 [QA-0488], and B4 [QA-0489]) should be used together following discussion of the A case (QA-0485). While purchasing now looks desirable, the B cases state that, politically and financially, the U.S. Congress is not prepared to buy the building at this time, which creates an opportunity for some other party to buy the property and lease it to the GSA. The B cases provide the context for two separate parties to consider bids for the property. The bidding-process context is rich, requiring a spreadsheet lease valuation and risk analysis on the part of each potential bidder. Each of the three bidders must prepare a bid that includes the annual lease payment, the party responsible for operating and maintenance costs, a dollar amount for the purchase option at the end of the lease to GSA (or an election to grant no purchase option), the amount of yearly escalation of the lease payment, and whether the bidder would allow any period of free rent. The B cases are to be used exclusively by four student teams playing assigned roles. In the B1 case (GSA), the team would evaluate each bid offered by the three parties and decide, on the basis of net present value, which was best. The GSA team must consider risk in its analysis, including the risk that the Department of Justice would not allow the GSA to assign its purchase option.

bargaining/bidding, competitive bidding, leasing, public administration, real estate markets, risk analysis, spreadsheets, Alternative Business Issue or Setting

Abstract:
The case describes a three-factor, full-factorial experiment run in conjunction with the Darden's Luckiest Student event of 2008. Prior to identifying Darden's Luckiest, all 300 first-year students made binding decisions between varying amounts of cash and the opportunity to select one of two identical briefcases. One briefcase contained $18,750; the other contained $0. Students are asked to analyze the results of the experiment and draw conclusions with respect to how the experimental factors influenced student decisions.

probability analysis, management science

Abstract:
A private investor (disguised) using a risk-analysis simulation program chooses whether to invest in a gas well or a real estate opportunity. The uncertainties vary considerably in kind and in time resolution.

financial resources, management of, management-decision models, project finance, risk analysis, simulation

Abstract:
Four years after the A and B cases (UVA-QA-0209 and UVA-QA-0210), the annual plan has drifted greatly from that suggested by the analysis in the B case. How can the decision-analysis methodology be simplified to provide routine planning guidance?

budgeting, decision analysis, decision theory, long-range planning, planning

Abstract:
Asea Brown Boveri, Mannheim, is considering the purchase of an East Berlin maufacturer of turbines from the Treuhandanstalt. It is an opportunity to start in East Germany and to work for markets in Eastern Europe. Low productivity, high pollution, potential inablity of Eastern customers to buy, and little information on the value of the company all make the opportunity very risky. Students evaluate the fit of this business within company strategy and evaluate whether the deal should proceed.

international business, diverse protagonist, European, diversity in the workplace, international case, diversity case, strategic planning, international

Abstract:
The US General Services Administration has 15 years remaining on a lease for a large building. The agency may continue to lease the building, purchase the building now, or purchase the building in 15 years (when the lease matures). The task in the A case is to use a spreadsheet model to evaluate the agency's options, which are uncertain regarding operating costs, inflation in operating costs, and property appreciation (which is correlated with inflation). Although the A case could be used alone, the B cases (B1 [QA-0486], B2 [QA-0487], B3 [QA-0488], and B4 [QA-0489]) should be used together following discussion of the A case.

bargaining/bidding, competitive analysis, leasing, public administration, real estate markets, risk analysis, spreadsheets, Alternative Business Issue or Setting

Abstract:
The US General Services Administration (GSA) has 15 years remaining on a lease for a large building. The agency may continue to lease the building, purchase the building now, or purchase the building in 15 years. The B2 case and the other B cases (B1 [QA-0486], B3 [QA-0488], and B4 [QA-0489]) should be used together following discussion of the A case (QA-0485). While purchasing now looks desirable, the B cases state that, politically and financially, the U.S. Congress is not prepared to buy the building at this time, which creates an opportunity for some other party to buy the property and lease it to the GSA. The B cases provide the context for two separate parties to consider bids for the property. The bidding-process context is rich, requiring a spreadsheet lease valuation and risk analysis on the part of each potential bidder. Each of the three bidders must prepare a bid that includes the annual lease payment, the party responsible for operating and maintenance costs, a dollar amount for the purchase option at the end of the lease to GSA (or an election to grant no purchase option), the amount of yearly escalation of the lease payment, and whether the bidder would allow any period of free rent. The B cases are to be used exclusively by four student teams playing assigned roles. In the B2 case although the Elger-Ott team is technically bidding to win the rights to purchase the building, the team is really buying up the purchase option so it will expire. The Elger-Ott team should win the bidding, if it is not too greedy.

bargaining/bidding, competitive bidding, leasing, public administration, real estate markets, risk analysis, spreadsheets, Alternative Business Issue or Setting

Abstract:
The US General Services Administration (GSA) has 15 years remaining on a lease for a large building.The agency may continue to lease the building, purchase the building now, or purchase the building in 15 years. The B3 case and the other B cases (B1 [QA-0486], B2 [QA-0487], and B4 [QA-0489]) should be used together following discussion of the A case (QA-0485). While purchasing now looks desirable, the B cases state that, politically and financially, the U.S. Congress is not prepared to buy the building at this time, which creates an opportunity for some other party to buy the property and lease it to the GSA. The B cases provide the context for two separate parties to consider bids for the property. The bidding-process context is rich, requiring a spreadsheet lease valuation and risk analysis on the part of each potential bidder. Each of the three bidders must prepare a bid that includes the annual lease payment, the party responsible for operating and maintenance costs, a dollar amount for the purchase option at the end of the lease to GSA (or an election to grant no purchase option), the amount of yearly escalation of the lease payment, and whether the bidder would allow any period of free rent. The B cases are to be used exclusively by four student teams playing assigned roles. In the B3 case (Karrman), the Karmann team represents a strong local developer with a lower hurdle rate than the other bidders, providing the team with an opportunity to come in with a low bid and win the property. As with the others, the question is how thin to slice it.

bargaining/bidding, competitive bidding, leasing, public administration, real estate markets, risk analysis, spreadsheets, Alternative Business Issue or Setting

Abstract:
The US General Services Administration (GSA) has 15 years remaining on a lease for a large building. The agency may continue to lease the building, purchase the building now, or purchase the building in 15 years. The B4 case and the other B cases (B1 [QA-0486], B2 [QA-0487], and B3 [QA-0488]) should be used together following discussion of the A case (QA-0485). While purchasing now looks desirable, the B cases state that, politically and financially, the U.S. Congress is not prepared to buy the building at this time, which creates an opportunity for some other party to buy the property and lease it to the GSA. The B cases provide the context for two separate parties to consider bids for the property. The bidding-process context is rich, requiring a spreadsheet lease valuation and risk analysis on the part of each potential bidder. Each of the three bidders must prepare a bid that includes the annual lease payment, the party responsible for operating and maintenance costs, a dollar amount for the purchase option at the end of the lease to GSA (or an election to grant no purchase option), the amount of yearly escalation of the lease payment, and whether the bidder would allow any period of free rent. The B cases are to be used exclusively by four student teams playing assigned roles. In the B4 case (STBW), the STBW team represents a fledgling real-estate partnership founded in California. The STBW team has the highest hurdle rate and a big need for current cash flow, but it has a lower tax rate. The STBW team may realize that its best bid is to set the annual lease rate high and allow the GSA to purchase the building at the end of the lease for $1.

bargaining/bidding, competitive bidding, leasing, public administration, real estate markets, risk analysis, spreadsheets, Alternative Business Issue or Setting, diverse protagonist, gender (female protagonist)

Abstract:
This case, part of a series (see also UVA-QA-0713 -- UVA-QA-0715), contains information known to both negotiating parties. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

decision analysis, negotiation

Abstract:
This case, part of a series (see also UVA-QA-0712, UVA-QA-0714, and UVA-QA-0715), contains information known only to Decker. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

decision analysis, negotiation

Abstract:
This case, part of a series (see also UVA-QA-0712, UVA-QA-0713, and UVA-QA-0715), contains information known only to Evenson. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

decision analysis, negotiation

Abstract:
This case, part of a series (see also UVA-QA-0712 -- UVA-QA-0714), contains the instructions for the series. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

decision analysis, negotiation

Abstract:
This case concerns a company’s advertising and redesign decisions for a DSL service. These decisions affect the switching of customers among various classifications, including those who currently use the service. The focus of the case will be on modeling the dynamics of the system and related optimal decision-making. How to structure spreadsheets using influence diagrams can be part of the discussion. The case provides an opportunity to discuss decisions using different time horizons.

influence diagrams, modeling

Abstract:
Much of strategy has been about defense, building the largest castle with the thickest walls to defend position and tying down the customer with switching costs, standards, and transaction costs. The digital age changed that, making ineffective the usual competitive advantages of size and scope, infrastructure, and the former capabilities. The metaphor has moved from walls to windows: for transparency, fresh air, connection, and some protection from the harsher elements. A proactive windows strategy assembles scale and scope collaboratively, creates relationships that make switching unattractive, develops intangible resources all along the value chain, and builds cospecialized capabilities. Illustrative examples come from three companies that have thrived in the digital age: eBay (a new company and industry), Lending Tree (new in an old industry), and Charles Schwab (old in an old industry).

strategy, value chain, capturing value