a) Calculate the Expected Value of Perfect Information (EVPI) b) What do you recommend?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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II.
+
James Scott is considering the possibility of opening a small outfit shop on Sta. Maria
District, a few blocks from St. Green Ville College. She has located on a mall that attracts
students. To open a small shop, medium sized shop, or no shop at all are her options.
The market can be good, average, or bad. The probabilities for these three possibilities
are 30% for good market, 50% for an average market, and 20% for bad market. The
profit or loss for the said market conditions are given in the table below;
ALTERNATIVE
Small Shop
Medium Sized Shop
No Shop
GOOD
150,000
200,000
0
AVERAGE
50,000
70,000
0
a) Calculate the Expected Value of Perfect Information (EVPI)
b) What do you recommend?
BAD
-80,000
-120,000
0
Transcribed Image Text:II. + James Scott is considering the possibility of opening a small outfit shop on Sta. Maria District, a few blocks from St. Green Ville College. She has located on a mall that attracts students. To open a small shop, medium sized shop, or no shop at all are her options. The market can be good, average, or bad. The probabilities for these three possibilities are 30% for good market, 50% for an average market, and 20% for bad market. The profit or loss for the said market conditions are given in the table below; ALTERNATIVE Small Shop Medium Sized Shop No Shop GOOD 150,000 200,000 0 AVERAGE 50,000 70,000 0 a) Calculate the Expected Value of Perfect Information (EVPI) b) What do you recommend? BAD -80,000 -120,000 0
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