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3325p11hs a decision making tools

# Maximax choice is to construct a large plant 2

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Unformatted text preview: max choice is to construct a large plant 2. Maximin choice is to do nothing 3. Equally likely choice is to construct a small plant A – 14 Risk Each possible state of nature has an assumed probability States of nature are mutually exclusive Probabilities must sum to 1 Determine the expected monetary value (EMV) for each alternative A – 15 Expected Monetary Value ( EMV or EV) EMV (Alternative i) = (Payoff of 1st state of nature) x (Probability of 1st state of nature) + (Payoff of 2nd state of nature) x (Probability of 2nd state of nature) +…+ (Payoff of last state of nature) x (Probability of last state of nature) A – 16 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...
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