A company is planning a plant expansion. They can build a large or small plant.

Question

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. What is the EVSI for this problem (in $ million)?

Explanation / Answer

So with information of sample the best outcome is build Large and EVSI = 154.42 Million

As compared to previous of 154.35 Million

So the

So there is an additional value of 0.07 Million.

(P1*P2) V (P*V) P1 P2 P Value EV Favorable Large High 0.63 0.92 0.5796 190 110.124 Low 0.63 0.08 0.0504 75 3.78 Small High 0.63 0.92 0.5796 98 56.8008 Low 0.63 0.08 0.0504 93 4.6872 Unfavorable Large High 0.37 0.3 0.111 190 21.09 Low 0.37 0.7 0.259 75 19.425 Small High 0.37 0.3 0.111 98 10.878 Low 0.37 0.7 0.259 93 24.087 Large 154.419 Small 96.453

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