Basic Business Statistics, Student Value Edition (13th Edition)
Basic Business Statistics, Student Value Edition (13th Edition)
13th Edition
ISBN: 9780321946393
Author: Mark L. Berenson, David M. Levine, Kathryn A. Szabat
Publisher: PEARSON
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Chapter 20, Problem 37PS

The owner of a company that supplies home heating oil would like to determine whether to offer a solar heating installation service to its customers. The owner of the company has determined that a stamp cost of  $150,000  Would be necessary, but a profit $2,000  Can be made on each solar heating system installed. The owner estimates the probability of various demand levels as follows:

Chapter 20, Problem 37PS, The owner of a company that supplies home heating oil would like to determine whether to offer a

a. Construct a payoff table, indicating the events and alternative courses of action.

b. Construct a decision tree.

c. Construct an opportunity loss table.

d. Compute the expected monetary value (EMV) for offering this solar heating system installation service.

e. Compute the expected opportunity loss (EOL) for offering this solar heating system installation service.

f. Explain the meaning of the expected value of perfect information (EVPI) in this problem.

g. Compute the return-to-risk ratio (RTRR) for offering this solar heating system installation service.

h. Based on the results of (d), (e), and (g), should the company offer this solar heating system installation service? Why?

i. How would your answers to (a) through (h) be affected if the startup cost were $200,000 ?

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Chapter 20 Solutions

Basic Business Statistics, Student Value Edition (13th Edition)

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