A customer has approached a bank for a $50,000 one-year loan at 12% interest. If the bank does not approve the loan, the $50,000 will be invested in bonds that earn a 6% annual return. WIthout further information, the bank feels that there is a 4% chance that the customer will totally default on the loan. If the customer totally defaults, the bank loses $50,000. At a cost of $500, the bank can thoroughly investigate the customer's credit record and supply a favorable or unfavorable recommendation. Past experiences indicates that p(favorable recommendations|customer does not default) =77/96 p(favorable recommendations|customer defaults)= 1/4 How can the bank maximize its expected profits? Find EVSI and EVPI.
A customer has approached a bank for a $50,000 one-year loan at 12% interest. If the bank does not approve the loan, the $50,000 will be invested in bonds that earn a 6% annual return. WIthout further information, the bank feels that there is a 4% chance that the customer will totally default on the loan. If the customer totally defaults, the bank loses $50,000. At a cost of $500, the bank can thoroughly investigate the customer's credit record and supply a favorable or unfavorable recommendation. Past experiences indicates that
p(favorable recommendations|customer does not default) =77/96
p(favorable recommendations|customer defaults)= 1/4
How can the bank maximize its expected profits? Find EVSI and EVPI.
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