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Tutorial 5 - Decision Analysis (Part 2) Original

# Choose the best alternative based on the optimal

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Unformatted text preview: =10,000*8% \$800 =10,000*9% \$900* Bad Market, (0.2) =10,000*0% \$0 =10,000*9% \$900* EMV \$760 \$900* By using the definition, EVPI=Expected Value with perfect information – Expected Value without perfect information - Expected Value with perfect information = 1,100×0.4 + 900×0.4 + 900×0.2 = \$980 - Expected Value without perfect information = \$900 EVPI= 980 – 900 = \$80 Conclusion: The maximum willing to pay for a newsletter is changed to \$80. CB2201 Sem B in 2012/2013 – TA1, TA3, TA4, TB5, TC4, TF4, TE3, TE4, TE5, TF1, and TF3 Q3.41 State of Nature Investment Good Economy, 0.2 Fair Economy, 0.3 Poor Economy, 0.5 Fund A \$10,000 \$2,000 -\$5,000 Fund B \$6,000 \$4,000 0 a) Draw the decision tree to represent this situation. b) Which investment should you choose to maximize the expected value? EMV (Fund A) = 10,000(0.2) + 2,000(0.3) + (-5,000)(0.5) = \$100 EMV (Fund B) = 6,000(0.2) + 4,000(0.3) + 0(0.5) = \$2,400 Conclusion: The best decision is to invest Fund B with the optimal EMV = \$2,400 c) Suppose there is question about the return of Fund A in a good economy. It could be higher or lower than \$10,000. What value for this would cause a person to be indifferent between Fund A and Fund B (i.e., the EMV(Fund A) and EMV (Fund B) would be the same)? Let X = Payoff for Fund A in a good economy EMV (Fund A) = EMV (Fund B) X (0.2) + 2,000(0.3) + (-5,000)(0.5) = 2,400 0.2X = 4,300 X = 21,500...
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