Reference no: EM132641398
Ashley is thinking of her career option after graduating with a bachelor degree. She already got a job offer from Iron Rice-container Company, and also got admitted to Ph.D. course in Indiana University. The Iron Rice-container Company offered her an annual salary of $50,000. If she decided to go to Ph.D. course, she has a 70% of chance of being successful in Ph.D. course. There would be no cost for completing Ph.D. course study only if she succeeded. If she failed in Ph.D. course, then Purdue University will charge tuitions and scholarships, which is amount of $100,000; she has to pay back to the university, then she will get a job at Iron Rice-container Company with an annual salary of $60,000. Even though she succeeds in Ph.D. course, she is not guaranteed to receive a high salary. If she succeeded in research, there is a 40% chance her research topic will be a trend, in which her expected salary will be $160,000, and a 60% chance that her research topic will be obsolete, where her expected salary will be $90,000. Moreover, she also has to decide - in the event of her success in Ph.D. - whether she should decide to get a job in academic area or industrial area. If she gets a job in academic area, her salary will be 5% more than the expected salary ($160,000 in the case her research topic is on trend, $90,000 in the case her research topic is obsolete). Her premium percentages to the expected salary when she gets a job in industrial area are primary dependent on two market conditions. Good Market condition has a premium percentage of 50% with probability .4, while bad has -30% with probability .6.
Suppose her decision is only dependent on her first annual salary minus corresponding cost (if exists) when she will get a job; that is, you ignore the opportunity cost of getting a job at Iron-Rice-container Company if she decided to go to Ph.D. (which takes five years); and ignore time-value of money.
a.) What decision she should make for maximizing her annual salary? Answer using decision tree approach.
b.) Determine the Expected Value of Perfect Information (EVPI) for the conditions of her succeeded or failed in Ph.D. course. Answer this question with a decision tree.