• April 15th, 2016

BUS520 Module 3 LP and 3 SLP

Paper, Order, or Assignment Requirements

Writer: This is case 3, you wrote case 1 and 2,

Module 3 – Background

Linear Regression Forecasting and Decision Trees

Case Background

Why is Forecasting important? How can we use Linear Regression as a forecasting method?

Read this this introductory resource: Forecasting for Business and Using Linear Regression

Read Chapter 6, Regression Analysis pp. 159–166, in this resource:

Chase, C. W. (2013). Demand-driven forecasting: A structured approach to forecasting. John Wiley & Sons: Somerset, NJ. Retrieved from the Ebrary.

The topics discussed here include:
1.Definition of regression
2.Correlation and regression
3.How to calculate the regression equation of X on Y.

OPTIONAL: Two videos on Khan Academy showing how to calculate regression coefficients.

Regression Line Example: https://www.khanacademy.org/video/regression-line-example?topic=statistics

Second Regression Example: https://www.khanacademy.org/video/second-regression-example?topic=statistics

PRACTICE: Download the Excel file LinReg-Practice-Examples.xlsx which provides an examples and practice problems to learn how to do regression analysis in Excel.

You are ready to do the Case problem.

SLP Background

What is a Decision Tree? How does it work? How do I create one?

Read Introduction to Decision Trees.docx

Download the Excel Add-in called SimpleDecisionTree_V1.4.xla and add it into your Excel.

Watch this video showing how to include an Add-in: https://permalink.fliqz.com/aspx/permalink.aspx?at=62469fea72a2420dae1ea19682bb9372&a=5fae3cf0f1624f39b0341263a6541ea0

Watch this video showing how to use the Simple Decision Tree tool: https://permalink.fliqz.com/aspx/permalink.aspx?at=38aa3b81400343c9bc2b78461f884789&a=5fae3cf0f1624f39b0341263a6541ea0

Practice creating a decision tree by using this example problem:

You have a choice of which game to play: flipping a coin or rolling a single die. It costs you $10 to play the game. If you choose the coin flip, you will win $15 for a heads, but will win only $3 for a tails. If you choose the die roll, you will win 3 times the amount showing on the die. For example, a 4 pays $12 and a 6 pays $18, while a 1 pays only $3.

Once you have created your d-tree for this problem, download this Excel file to check it: Decision-Tree-which-game.xlsx

You are ready for SLP 3.

Additional Required Reading

(For Discussions, Module 2, 3, and 4)

Download and read Subjective Assessments of Risk and Uncertainty on subjective probabilities in risk decisions. This paper will be useful for the discussion questions in Module 2, 3, and 4.

Get this journal article from the library. It is lengthy, but you only need to read Section 1.1, pp. 3-5. This section provides a very good review of three major biases that have been studied by the famous team of Kahneman and Tversky.

Laibson, D., & Zeckhauser, R. (1998). Amos Tversky and the ascent of behavioral economics. Journal of Risk & Uncertainty. Feb1998, Vol. 16 Issue 1, p7-47. 41p. Retrieved from Business Source Complete (EBSCO) in the Trident Online Library.

Module 3 – Case ( Writer: Please write only 4 pages)

Linear Regression Forecasting and Decision Trees

Assignment Overview

Scenario: You are consultant for the Excellent Consulting Group. Your client wants to be able to forecast sales on a monthly basis and believes that there is a valid relationship between sales and the number of hits on their website during the previous month. To test this theory, the client has collected data on sales of one of its products, a lottery app for smart phones and hits on its website.

Case Assignment

Using Excel and linear regression analyze the data and determine how to do forecasting using website hits.

Then forecast the next three months using the monthly hits data. Compare the forecast to the actual sales and determine the forecasting error. Ask your Instructor for the data for the actual sales when you are ready.

Then write a report to your boss and the client that briefly describes the results that you obtained. Make a recommendation on how this might be used for forecasting purposes.

Data: Download the Word file Case 3 Data.docx with the data. Use this data in Excel for your analysis.

Assignment Expectations

Analysis
•Accurate and complete Linear Regression analysis in Excel.

Written Report
•Length requirements = 4–5 pages minimum (not including Cover and Reference pages)
•Provide a brief introduction/ background of the problem.
•Complete and accurate Excel analysis.
•Written analysis that supports Excel analysis, and provides thorough discussion of assumptions, rationale, and logic used.
•Complete, meaningful, and accurate recommendation(s).

Module 3 – SLP ( Writer: Please only write 2 pages)

Linear Regression Forecasting and Decision Trees

Scenario: Using the situation from SLP2, recall that you are deciding between two investments. However, they each require a different initial investment amount. And you also have a third option, to invest in a 10 year municipal bond with a very high return. Here are the investment options with the augmented data.

Option A: Real estate development. This is a risky opportunity with the possibility of a high payoff, but also with no payoff at all. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the Net Present Value of the cash flow and probabilities.

Required initial investment: $0.75 million

High NPV: $5 million, Pr = 0.5

Medium NPV: $2 million, Pr = 0.3

Low NPV: $0, Pr = 0.2

Option B: Retail franchise for Just Hats, a boutique type store selling fashion hats for men and women. This also is a risky opportunity but less so than option A. It has the potential for less risk of failure, but also a lower payoff. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the Net Present Value of the cash flow and probabilities.

Required initial investment: $0.55 million

High NPV: $3 million, Pr = 0.75

Medium NPV: $2 million, Pr = 0.15

Low NPV: $1 million, Pr = 0.1

Option C: High Yield Municipal Bonds. This option has low risk and is assumed to be a Certainty. So there is only one outcome with probability of 1.0
Required initial investment: $0.75 million
NPV: $1.5 million, Pr = 1.0

Assignment

Develop an analysis of these three investments. Use expected NPV to determine which of these you should choose. Be sure to include all cash flows to generate the total NPV of each alternative. Do your analysis in Excel using decision tree.

Write a report to your private investment company and explain your analysis and your recommendation. Provide a rationale for your decision.

Upload both your written report and Excel file with the decision tree analysis to the SLP 3 Dropbox.

BONUS (2.0 pts): If the two options A and B could be made to be equal, what would have to change in the NPVs in Option A to make it equal to Option B?

SLP Assignment Expectations

Analysis
•Accurate and complete Excel analysis.

Written Report
•Length requirements = 2–3 pages minimum (not including Cover and Reference pages)
•Provide a brief introduction/ background of the problem.
•Complete and accurate Excel analysis.
•Written analysis that supports Excel analysis, and provides thorough discussion of assumptions, rationale, and logic used.
•Complete, meaningful, and accurate recommendation(s).

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