3325p11hs a decision making tools

The best outcome for the state of nature favorable

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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 $0. Expected value with perfect = ($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. Thus: EVPI = EVwPI – Maximum EMV = $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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