Reference no: EM133531009

Case Study: Nganunu Corporation (NC) purchased land that will be the site of a new luxury double-storey complex. The location provides a spectacular view of the surrounding countryside, including mountains and rivers. NC plans to price the individual units between R300 000 and R1 400 000. NC commissioned preliminary architectural drawings for three different projects: one with 30 units, one with 60 units and one with 90 units. The financial success of the project depends upon the size of the complex and the chance event of demand for the units. The decision problem is to select the size of the new complex that will generate the largest profit, given the uncertainty about the demand of for the units. The information on the NC case (in terms of action and states of nature), including the corresponding payoffs, can be summarised as follows: Alternative Decision States of nature Strong demand (SD) Weak demand (WD) Probability 0.8 0.2 Small complex (D1) 8 7 Medium complex (D2) 14 5 Large complex (D3) 20 -9 The management of NC is considering a six-month market research study to learn more about the potential market's acceptance of the NC project. Suppose that the company asks economic experts for their opinion on the potential market's acceptance of the NC project. Historically, their upside predictions have been 90% accurate, while their downside predictions have been 60% accurate.

Question a) Using decision trees, determine the best strategy

i. if Nganunu does not use experts

ii. if Nganunu uses experts

Question b) What is the expected value of sample information (EVSI)

Question c) What is expected value of perfect information (EVPI)?

Question d) Based on your analysis and using only the part of the decision tree where NC used experts, provide a corresponding risk profile for the optimal decision strategy.