dwards Machine Tools needs to purchase a new machine. The basic model is slower
ID: 422791 • Letter: D
Question
dwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, whereas the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years.
A forecasting study determines that he probabilities of demand volume are: Low = 0.2, Medium = 0.3, and High = 0.5. Compute the expected value of perfect information (EVPI). Round your answer to the nearest dollar.
Demand Volume Decision Low Medium High Basic model $90,000 $100,000 $155,000 Advanced model $35,000 $135,000 $225,000Explanation / Answer
EXPECTED VALEU WITH PERFECT INFORMATION IS THE MAXIMUM POSSIBLE PROFIT SO THE CALCULATION IS DONE BASED ON HIGHER PROFIT VALUE( 171000$ )
DEMAND VOLUME EXPECTED VALEU WITHOUT PERFECT INFORMATION EXPECTED VALEU WITH PERFECT INFORMATION DECISION LOW MEDIUM HIGH 90000*0.2 + 135000*0.3 + 225000*0.5 = 171000 Basic modeL 90000 100000 155000 90000*0.2 +100000* 0.3 + 155000* 0.5 = 125500 Advance model 35000 135000 225000 35000*0.2 + 135000*0.3 + 225000*0.5 = 160000 PROBABILITY 0.2 0.3 0.5 EXPECTED VALEU WITHOUT PERFECT INFORMATION IS THE MEAN VALUE( EXPECTED VALUE AMONG THE ABOVE TWO THE ADVANCE MODEL CAN EARN MORE PROFIT(160000$)EXPECTED VALEU WITH PERFECT INFORMATION IS THE MAXIMUM POSSIBLE PROFIT SO THE CALCULATION IS DONE BASED ON HIGHER PROFIT VALUE( 171000$ )
EVPI IS THE DIFFERENCE AMONG THE ABOVE TWO VALUES, SO EVPI = 171000 - 160000 = 11000$Related Questions
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