3325p11hs a decision making tools

5100000 5 20000 40000 3 emva3 50

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Unformatted text preview: )(-$20,000) = $40,000 3. EMV(A3) = (.5)($0) + (.5)($0) = $0 A – 17 EMV Example States of Nature Favorable Market Unfavorable Market Market Construct large plant (A1) $200,000 -$180,000 Construct small plant (A2) $100,000 -$20,000 Do nothing (A3) $0 $0 Probabilities .50 .50 Alternatives 1. EMV(A1) = (.5)($200,000) + (.5)(-$180,000) = $10,000 2. EMV(A2) = (.5)($100,000) + (.5)(-$20,000) = $40,000 (.5)($100,000) $40,000 Best Option 3. EMV(A3) = (.5)($0) + (.5)($0) = $0 A – 18 Decision Making Under Certainty Is the cost of perfect information worth it? Determine the expected value of perfect information (EVPI) A – 19 Expected Value of Perfect Information EVPI is the difference between the payoff EVPI under certainty and the payoff under risk under Expected value with Expected perfect EVPI = perfect information – Expected value with perfect information (EVwPI) Maximum Maximum EMV EMV = (Best outcome or consequence for 1st state of nature) x (Probability of 1st state of nature) + Best outcome for 2nd state of nature) x (Probability of 2nd state of nature) + … + Best outcome for last state of nature) x (Probability of last state of nature) A – 20 EVPI Example 1. The best outcome for the st...
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