Ch. 5 Supplement Decision Theory

Ch. 5 Supplement Decision Theory - Supplement to Chapter 05...

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Supplement to Chapter 05 - Decision Theory SUPPLEMENT TO CH. 5 DECISION THEORY Problem 2 b. c. EPC: .30(50) + .70(80) = $71 Exp. Profit: 62 EVPI: $ 9 5S-1 a. Expected profit Do Nothing $57 = 50 (.3) + 60 (.7) Expand 62 [Best] = 20 (.3) + 80 (.7) Subcontract 61 = 40 (.3) + 70 (.7) .3 .7 .3 .7 .3 .7 $50 $60 $20 $80 $40 $70 $62 Expand $57 Do Nothing $61 Subcontr.
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Supplement to Chapter 05 - Decision Theory Problem 4 a. 1) Draw a tree diagram 2) Analyze decisions from right to left (i.e., work backwards from the end of the tree towards the root). For instance, begin with decision 2 and choose expansion because it has a higher present value ($450,000 vs. $50,000). 3) Compute the expected value of the ends of the remaining branches (numbered 1 to 5 in the diagram), and then determine the expected value for the two initial alternatives. (1).4 x $400,000 = $160,000 (2)(eliminated) $430,000 (expected value if build small is chosen) (3).6 x $450,000 = $270,000 (4).4 x –$10,000 = $–4,000 (5).6 x $800,000 = $480,000 $476,000 (expected value if build large is chosen) 4) Since the expected value of building a large plant has the higher expected value, select the large plant alternative.
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Ch. 5 Supplement Decision Theory - Supplement to Chapter 05...

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