The Super Cola Company must decide whether or not to introduce a new diet soft d

Question

The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management feels that if it does introduce the diet soda it will yield a profit of $1.25 million if sales are 100 million, a profit of $300,000 if sales are 50 million, or it will lose $1.75 million if sales are only 1 million bottles. If Super Cola does not market the new soda diet soda idea, it will suffer a loss of $400,000. An internal marketing research study has found P(100 million in sales) = 1/2, P(50 million in sales) = 1/3, and P(1 million in sales) = 1/6. a. What is the EVPI (expected value of perfect information)?

b. A consulting firm can perform a more thorough study for $350,000. Should management have this study performed?

c. If the conditional probabilities are .75, .15, and .10 for the three states what would be the expected value of sample information (EVSI)? *Please complete in excel and show all corresponding formulas. **I am solely checking my work for this problem so work shown is not required but would be helpful. Thank you!!!

Explanation / Answer

a) EMV of decision to introduce the diet soda = 1.25*1/2 + 0.3*1/3 - 1.75*1/6 = $ 0.433 m

EMV of decision NOT to introduce the diet soda = $ - 0.4 m

Maximum EMV is 0.433 of decision to introduce the diet soda

Expected Value with Perfect Information (EVwPI) = 1.25*1/2+0.3*1/3 - 0.4*1/6 = $ 0.6583 m

EVPI = EVwPI - EMVmax = 0.6583 - 0.4000 = $ 0.2583 m or $ 258,333

b) EVPI is 258,333 (which is less than 350,000). Therefore management should not hire the consulting firm for $ 350,000

c) To determine the posterior probabilities and EVSI, we need to know the probability of prediction of the three states, in addition to the conditional probabilities.

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