XYZ coating company has reviewed four new processes for improving their coating

Question

XYZ coating company has reviewed four new processes for improving their coating line. The four processes, labeled A, B, C, and D use different technology and have different capacities. All the processes have the same level of production and the lifetime.
The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars.
Forecasts indicate that there is a 0.5 probability of acceptance level 1, 0.6 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4.

Using the criterion of expected monetary value, which production alternative should be chosen? (Points : 30)

XYZ coating company has reviewed four new processes for improving their coating line. The four processes, labeled A, B, C, and D use different technology and have different capacities. All the processes have the same level of production and the lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.5 probability of acceptance level 1, 0.6 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4. Using the criterion of expected monetary value, which production alternative should be chosen?

Explanation / Answer

EMV for A = -95*0.5 -5 * 0.6 +145*0.4 +115 * 0.3 = 42

EMV for B = 35*0.5 +55 * 0.6 +75*0.4 +125 * 0.3 = 118

EMV for C = 55*0.5 +55 * 0.6 +65*0.4 + 55 * 0.3 = 103

EMV for D = 75*0.5 +85 * 0.6 +65*0.4 + 55 * 0.3 = 131

Hence D is the most chosen alternative

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