Reference no: EM132939943
Diet Coke is also considering introduction of a new brand of diet root beer. An internal study by the management estimates that the probability of success for their new diet root beer is 0.60. Of course they have the option of not producing the product. They have estimated the following payoff table for each choice.
Choices
Introduction of the new Introduction of the new product will be a success product will be a Failure
S1 S2
Produce the new brand of diet root beer $250,000 -$300,000
Do not produce the new brand of diet root beer -$50,000 -$20,000
Beside "Soft Drink Consultants", they have asked the help of another consulting firm "Innovative Research Inc." to help managers of Diet Coke to make an optimum decision.
The "Soft Drink Consultants" provides two indicators, either I1 (Soft Drink Consultants recommends introduction of the new product) or I2 (Soft Drink Consultants doesn't recommend introduction of the new product), for which P( I1 / S1) = 0.70 and P( I1 / S2) = 0.40.
The "Innovative Research Inc." provides two indicators, either J1 (Innovative Research recommends introduction of the new product) or J2 (Innovative Research doesn't recommend introduction of the new product), for which P( J1 / S1) = 0.60 and P( J1 / S2) = 0.30.
Problem a. After receiving such results, recommend an optimal decision for Diet Coke, assuming that management believes that results of neither consulting firms' are correct and their study will NOT be used. Over what range of probability of success their decision is optimal?
Problem b. Calculate the EVPI
Problem c. Calculate the EVSI and the efficiency for both consultants.
Problem d. If both consultants charge $5,000, which firm should be hired and why?
Problem e. If Soft Drink Consultants charges $10,000 and the "Innovative Research Inc." charges $4,000, which consulting firm should be used and why. Explain in details.
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