5) President of Kim Manufacturing, Inc., is considering whether or not to build

Question

5) President of Kim Manufacturing, Inc., is considering whether or not to build more manufacturing plants in Wisconsin. Her decision is summarized in the following table ALTERNATIVES FAVORABLE ARKET UNFAVORABLE MARKET (S) Build Large Plant Build Small Plant 300,000 10,000 0 0.6 400,000 80,000 Don't Build Market Probabilities 0.4 a) What is the best decision based on the Expected Monetary Value (EMV) b) Construct an opportunity loss table e) Determine EOL (Expected Opportunity Loss) and conclude the best alternative. d) Calculate the Expected Value of Perfect Information (EVPID using the formul EVPI-EV(with )PI-PV(without)PI. Compaire your results wit EOLthat you have it from your answer in c).

Explanation / Answer

a) EMV of Build Large Plant = 400000*0.4 - 300000*0.6 = -20000

EMV of Build Small Plant = 80000*0.4 - 10000*0.6 = 26000

EMV of Don't Build = 0

EMV of Build Small Plant is the highest (=26,000).

Therefore, best decision is to Build Small Plant

b) Opportunity loss table is constructed by subtracting the payoff from the maximum payoff for that particular state of nature as follows

c)

EOL of Build Large Plant = 0*0.4 + 300000*0.6 = 180,000

EOL of Build Small Plant = 320000*0.4 + 10000*0.6 = 134,000

EOL of Don't Build = 400000*0.4 + 0*0.6 = 160,000

Minimum EOL is 134,000 , it is associated with decision Build Small Plant

Therefore, the best alternative is: Build Small Plant

d)

EV(with)PI = Best Payoff when market is favorable * Probability of favorable market + Best payoff when market is unfavorable * Probability of unfavorable market.

= 400000*0.4 + 0*0.6 = 160,000

EV(without)PI = 26,000

EVPI = 160000 - 26000 = 134,000

EVPI is the same as the value of EOL.

Favorable market Unfavorable market Build Large Plant 400000 - 400000 = 0 0 - (-300000) = 300,000 Build Small Plant 400000 - 80000 = 320,000 0 - (-100000) = 10,000 Don't Build 400000 - 0 = 400,000 0 - 0 = 0

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.