Study Case Lawsuit Defense Strategy

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1.DECISION TREE

Allied Accepts John's
Offer of $750,000$750 000

John accepts Allied counteroffer

Allied counteroffers with $400 000



Based on the decision tree above, I must fold back the decision tree in order to calculate the expected values and to find the optimal decision. Hence, the decision that I will fold back is at node No. 1 which is John accepts the offer of $750 000 and at node No. 4 which is Allied rejects John’s offer of $600 000 because both of them seem unrealistic and gives disadvantage to the both parties. So, now I can be able to calculate the expected values as below:

EV (Node 3)= (1500 000 X 0.3) + (750 000 X 0.5) + (0 X 0.2)= $825 000 EV (Node 5)= (1500 000 X 0.3) + (750 000 X 0.5) + (0 X 0.2)= $825 000 EV (Node 4)= (600 000 X 1.0)= $600 000

EV (Node 2)= (400 000 X 0.1) + (825 000 X 0.4) + (600 000 X 0.5)= $670 000 EV (Node 1)= (400 000 X 0.1) + (825 000 X 0.4) + (600 000 X 0.5)= $670 000

2.I recommend that Allied should not accept the offer of $750 000 from John. It is because, based on the expected value at node 1, it show that $670 000 which is much cheaper than from the offer of $750 000 from John. So, the strategy to counteroffer of $400 000 is better than accepting John’s offer.

3.If John accepts Allied's counteroffer of $400,000, so there is no further action required. If John rejects Allied's counteroffer and decides to have a jury‘s settlement amount, Allied must prepare for a trial. If John counteroffers with $600,000, so Allied should accept John's counteroffer.

4.RISK PROFILE

P (0)= 0.2 X 0.4= 0.08
P (400 000)= 0.1
P (600 000)= 0.5
P (750 000)= 0.5 X 0.4= 0.2
P (1500 000)= 0.3 X 0.4= 0.12____ Total Probabilities 1.00
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