Determine the expected value of perfect information

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A financial institution is evaluating the loan application of an entrepreneur who has come up with a revolutionary product for which he needs developmental funding. The entrepreneur has practically no assets for collateral, but offers the institution a portion of the profits if the product is successful. The loan officer has constructed the following payoff table, with institution profits in thousands of dollars and the probabilities estimated for three states of nature.

	The Product's level of success is
	Low (0.1)	Moderate (0.3)	High (0.6)
Loan the full amount requested	-$25	$20	$50
Loan half the amount requested	-$10	$10	$20
Do not grant the loan	$0	$0	$0

Using the expected payoff criterion, which alternative will be selected and what is its expected monetary value? Determine the expected value of perfect information and interpret its meaning.

Reference no: EM131409919

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