Compute the expected value of perfect information

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Reference no: EM131760944

Greg Jones is running a manufacturing company that is experiencing a substantial backlog. Greg is considering three alternatives. The correct choice will depend on the level of future demand. The various decision alternatives and the profits under different levels of future demand are as follows: DECISION ALTERNATIVES STATES OF NATURE (Levels of future demand) High demand Medium demand Low demand Arrange for subcontracting $100,000 $100,000 $20,000 Begin overtime production $200,000 $120,000 -$40,000 Construct new facilities $400,000 $40,000 -$300,000

a. Which decision alternative should Greg select using the MAXIMAX approach? What is the corresponding profit? b. Which decision alternative should Greg select using the MAXIMIN approach? What is the corresponding profit? c. Which decision alternative should Greg select using the Laplace (or equally likely) approach? What is the corresponding profit?

After consulting with the senior management at the company, Greg was able to estimate the probabilities for the three states of nature: P(high demand) = 0.40; P(medium demand) = 0.50; P(low demand) = 0.10. d. Construct a decision tree for this problem. e. If maximum expected monetary value (EMV) is used as the decision criterion, which decision alternative should Greg select? What is the corresponding expected profit? f. Compute the expected value of perfect information (EVPI) for Greg. g. If a sales forecasting firm claims to have the perfect information about the market demand and is offering its services for $71,500, would you advise Greg to accept the offer? Explain your reasoning.

Reference no: EM131760944

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