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ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making

Bexley Co is choosing between three projects. Profits ($000) under three economic conditions (Weak, Normal, Strong) are: Project A: 40, 90, 120; Project B: 20, 100, 150; Project C: 60, 80, 110. Which project is chosen under the maximax rule?

Project B is chosen under maximax. The rule selects the option with the highest possible payoff. The best outcomes are 120 for A, 150 for B and 110 for C, so B's 150 is the largest, reflecting an optimistic decision maker.

  1. AProject A
  2. BProject BCorrect
  3. CProject C
  4. DProjects A and C are tied

Explanation

Maximax takes the best outcome of each project: A 120, B 150, C 110. The highest is 150, which is Project B. Project C would be chosen under maximin (worst 60), so selecting C is a maximin error.

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