Key considerations as Allied develops its strategy for disposing of the case are the probabilities associated with John’s response to an Allied counteroffer of $400,000 and the probabilities associated with the three possible trial outcomes. John will accept a counteroffer of $400,000 is 0.10, John will reject the counteroffer of $400,000 is 0.40, and John will make a counteroffer of $600,000 is 0.50. If the case goes to court, they believe the jury will award John damages of $1,500,000 is 0.30, award John damages of $750,000 is 0.50 and the probability the jury will award John nothing is 0.20.

Question

1.) Make a decision tree

2.) A recommendation regarding whether Allied should accept John’s offer to settle the claim for $750,000.

3.) A decision strategy that Allied should follow if they decide to make John a counteroffer of $400,000.

4.) A risk profile for your recommended strategy.

Answer 1

I agree on the strategy, make a decision tree, and expected value of either decision.

I assume you know how to do the decision tree.