Determine the expected value of perfect information

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Reference no: EM13106112

Mary Decker is thinking of suing the manufacturer of her car because of a defect that she believes caused her to have an accident, and kept her out of work for a year. She is suing the company for $3.0 million. The company has offered her a settlement of $500,000 of which Mary would receive $300,000 after attorney's fees. Her attorney has advised her that she has a 60% chance of winning her case. If she loses she will incur attorneys' fees and court costs of $60,000. If she wins she is not guaranteed to receive the full 3 million. Her attorney believes that there is a 50% chance she could receive the full amount, in which case Mary would get $2 million after her attorney takes his cut, and a 50% chance that the jury will award her a lesser amount of $1 million, of which Mary would get half. Furthermore, Mary has to decide- in the event of her winning the case or going for the settlement- as to whether she should invest the money in the stock market or put it into a fixed deposit earning 10% simple interest at the end of the year. Her profit percentages from the stock market under two market conditions at the end of the year are shown in the table below: Market Conditions Profit Probability Good 20% 0.6 Bad -10% 0.4 a) Should Mary sue the company or take the settlement? Answer this question with a decision tree. b) Determine the Expected Value of Perfect Information (EVPI) for the conditions of winning or losing the case. Answer this question with a decision tree.

Reference no: EM13106112

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