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13 September, 02:18

Suppose a manufacturing plant is considering three options for expansion. The first one is to expand into a new plant (large), the second to add on third-shift to the daily schedule (medium) and the third to do nothing (small). There are three possibilities for demand. These are high, medium, and low with the probability of. 5 (H),.25 (M),.25 (L) of occurring. Suppose that the profits for the expansion plans are as follows (respective to high, medium, low demand). The large expansion profits are $100000, $10000,-$10000, the medium expansion choice $40000, $40000, $5000 and the small expansion choice $15000, $15000, $15000. a. What is the highest EMV? b. What is EVwPI? c. What is the organization willing to pay for perfect information? d. Which of the expansion plans should the manager choose?

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Answers (2)
  1. 13 September, 05:28
    0
    1a $50000

    1b is the price that an individual is willing to pay to get perfect information

    1c $35125

    1d Choose large expansion

    Explanation:

    Large expansion

    (0.5*100000) + (0.25*100000) + (0.25*-100000)

    =$50000

    Medium expansion

    (0.5*40000) + (0.25*40000) + (0.25*5000)

    =$31250

    Small Expansion

    (0.5*15) + (0.25*15000) + (0.25*15000)

    =$15000

    EMV = $500000

    1b EPwPI is the price that a and individula is willing to pay to get perfect information

    1c

    Large expansion

    (0.5*10000) + (0.25*40000) + (0.25*15000)

    =$18750

    Medium expansion

    (0.5*10000) + (0.25*40000) + (0.25*15000)

    =$18750

    Small Expansion

    (0.5*-10000) + (0.25*5000) + (0.25*15000)

    =$-1125

    EV = $18750+$18750-1125

    =$36375

    EPwPI = 50000 - 36375

    =$35125

    1d They should choose large expansion as it has the highest expected return.
  2. 13 September, 05:44
    0
    a. $50,000

    b. $77,500

    c. $27,500

    d. Large expansion or plant

    Explanation:

    a. What is the highest Expected Monetary Value (EMV) ?

    1. EMV of Large expansion = ($100000*0.50) + ($10000*0.25) + (-$10000*0.25)

    EMV of Large expansion =

    2. EMV of Medium expansion = ($40000*0.50) + ($40000*0.25) + ($5000*0.25)

    EMV of Medium expansion = $31,250

    3. EMV of Small expansion = ($15000*0.50) + ($15000*0.25) + ($15000*0.25)

    EMV of Small expansion = $15,000

    The highest EMV is $50,000 which is the EMV of Large expansion.

    b. What is Expected Value with Perfect Information (EVwPI) ?

    EVwPI is obtained by adding together the expected value of the highest profit from each of the expansions as follows:

    EVwPI = ($100000*0.50) + ($40000*0.50) + ($15000*0.50)

    EVwPI = $77,500

    c. What is the organization willing to pay for perfect information?

    This requires the calculation of Expected Value of Perfect Information (EVPI). This can be obtained as follows:

    EVPI = EVwPI - EVwoPI

    Where EVwoPI denotes Expected Value without Perfect Information and it is is the highest EMV of $50,000 which is the EMV of Large expansion obtained in a above.

    Substituting the figures, we have:

    EVPI = $77,500 - $50,000 = $27,500

    d. Which of the expansion plans should the manager choose?

    The manager should choose the large expansion because it has the highest or maximum EMV of $50,000.
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