Homework 4 2018.doc

# Saving year3 saving year4 saving year5 saving pw

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Saving Year3 Saving Year4 Saving Year5 Saving PW Optimistic -125000 60000 63000 66150 69457 72930 79063 Most likely -125000 40000 42000 44100 46305 48620 11042 Pessimistic -125000 18000 18900 19845 20837 21879 -63781

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Now we calculate EVPI, where we assume that we can do a perfect test to “forecast” the performance of the new design. With the perfect information regarding the output of the new design, the decision depends on the output, where the new design is taken for cases of “Optimistic” and “Most Likely”, and current design is taken for case “Pessimistic”. We can then calculate the new W[PW] as follows Performance Probability Decision With Perfect Information Results (j) p(j) Decision Outcome Optimistic 0.30 New \$79,063 Most Likely 0.55 New 11,042 Pessimistic 0.15 Current 0 Expected Value: \$29,792 EVPI = \$29,792 − \$20,225 = \$9,567 Note:         The EVPI is the maximum amount that ought to be spent to obtain  additional information prior to making a decision.
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• Fall '14
• Widen Bridge, \$9,567

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