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Unformatted text preview: ate of nature
“favorable market” is “build a large facility” with
a payoff of $200,000. The best outcome for
“unfavorable” is “do nothing” with a payoff of
= ($200,000)(.6) + ($0)(.4) = $120,000
information A – 21 EVPI Example
2. The maximum EMV is $52,000, which is the
expected outcome without perfect information.
EVPI = EVwPI – Maximum
= $120,000 – $52,000 = $68,000
The most the company should pay for perfect
information is $68,000
A – 22 Decision Trees Information in decision tables can be displayed as
decision trees A decision tree is a graphic display of the
decision process that indicates decision
alternatives, states of nature and their respective
probabilities, and payoffs for each combination of
decision alternative and state of nature Appropriate for showing sequential decisions A – 23 Decision Trees A – 24 Decision Trees
1. Define the problem
2. Structure or draw the decision tre...
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- Spring '14