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 AVORABLE UNFAVORABLE MARKETS) -300,000 Build Large Plant Build Small Plant Don't Build 400,000 80,000 -10,000 Market Probabilities 0.6 0.4 a) What is the best decision based on the Expected Monetary Value (EMV). b) Construct an opportunity loss table c) Determi ine EOL (Expected Opportunity Loss) and conclude the best alternative. ion (EVPI) using the formula with the value of EVPI -EV(with )PI- PV(without)PI. Compaire your resu EOLthat you have it from your answer in c).

Explanation / Answer

Solution

(a) EMV large plant = (0.4)(400,000)+(0.6)(-300,000) = -20,000

EMV small plant = (0.4)(80,000)+(0.6)(-10,000) = 26,000

EMV don't build = 0

Best decision : Bulid Small plant (maximum EMV)

(b) Opportunity loss table

(c) EOL Large plant = 0*0.4+300,000*0.6 = 180,000

EOL small plant = 320,000*0.4+10000*0.6 = 134,000

EOL don't build = 400,000*0.4+0 = 160,000

Decision : Build Small Plant (minimum EOL)

(d) EVPI :

EVgivenPI = 400,000*0.4+0 = 160,000

EVPI = 160,000-26,000 = 134,000 which is equal to EOL

Alternatives Favorable Market Unfavorable market Build Large plant 0 (400,000-400,000) 300,000 (0-(-300,000)) Build Small plant 320,000 (400,000-80,000) 10,000 Don't build 400,000 0

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