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Buy one of three machines

# Buy one of three machines - \$3 \$5 \$0.6 \$0.6 \$2.5 = \$3.70...

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Problem: A company is considering buying one of 3 machines to make a product. Cost to make one unit of the product depends on the volume of production which in turn depends on projected demand. The following table summarizes the demand and costs per unit: Demand Low Medium High 0.3 0.2 0.5 Buy A \$2.00 per unit \$3 \$5 Buy B \$3.00 \$2 \$4 Buy C \$2.50 \$4 \$3 a. What is the best alternative? b. Construct the Regret Table c. What is the EVPI?

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Solution: Demand EXPECTED COST PER UNIT Low Medium High 0.3 0.2 0.5 Buy A \$2.00 per unit
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Unformatted text preview: \$3 \$5 \$0.6 + \$0.6 + \$2.5 = \$3.70 Buy B \$3.00 \$2 \$4 \$0.90 + \$0.40 + \$2.00 =\$3.30 Buy C \$2.50 \$4 \$3 \$0.75 + \$0.80 + \$1.50 =\$3.05 a. If the goal is to minimize cost, the best alternative is to buy machine C b. The Regret Table is: Demand EXPECTED COST PER UNIT Low Medium High 0.3 0.2 0.5 Buy A \$0 \$1 \$2 \$0.2 + \$1.0 = \$1.20 Buy B \$1.00 \$0 \$1 \$0.30 + \$0.50 = \$0.80 Buy C \$0.50 \$2 \$0 \$0.15 + \$0.40 = \$0.55 c. The EVPI = Minimum Expected Regret = \$0.55....
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Buy one of three machines - \$3 \$5 \$0.6 \$0.6 \$2.5 = \$3.70...

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