Use the following decision tree, but update the probabilities as follows: Probab

Question

Use the following decision tree, but update the probabilities as follows: Probability of Small Demand = 14% Probability of Medium Demand = 12% Probability of Large Demand = remaining probability What is the expected monetary value of the best decision (in millions)?

Use the following decision tree, but update the probabilities as follows: Probability of Small Demand-24% Probability of Medium Demand-37% Probability of Large Demand-remaining probability What is the expected value with perfect information (in millions)? $1.0 $1.3 $1.3 $1.5 $1.6 $1.8 $0.7 $1.5 $1.0 $1.6 $1.6 $1.5 $1.7 $0.9 $1.4 $1.0 $1.0 $1.1 $0.9 0o Do Expand Medium demand (.5) Do Do use 82 Net present value in millions $2.4

Explanation / Answer

P(Small demand) = 0.24

P (Medium demand) = 0.37

P(Large demand) = 0.39

Now,

I. Expected value of subcontract = Expected value of small demand + Expected Value of Medium Demand + Expected Value of Large demand

=> E( Sub contract) = P(Small demand)*Best Returns + P (Medium Demand)* Best Return + P(Large Demand)* Best Demand

=0.24*$1 + 0.37*$1.3 + 0.39*$1.8 = $1.423

Similarly,

II. E(Expand) = 0.24*1.5 + 0.37*1.6 + 0.39*1.7 = $1.615

III E (BUILD) = 0.24*1.4 + 0.37*1.1 + 0.39*2.4 = $1.679

Hence, Expected value is highest for the alternative Build = $1.679

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