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Eduardwww [97]
3 years ago
13

If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent respectively, What is

EVPI (Expected value of Perfect Information)?
Physics
1 answer:
Brilliant_brown [7]3 years ago
7 0

Question:

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows:

Alternative             Precipitation                                

                        Low                Normal                 High

Do nothing    -100                       100                    300

Expand           350                       500                   200

Build new       750                       300                    0

If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent respectively, What is EVPI (Expected value of Perfect Information)?

A. $140,000

B. $170,000

C. $285,000

D. $305,000

E. $475,000

Answer:

D. $170,000

Explanation:

The expected long run profits are  for

                        Low                Normal                 High

Do nothing    -100*0.3                100*0.2                   300*0.5 = 140

Expand           350*0.3                500*0.2                  200*0.5 = 305

Build new       750*0.3                300*0.2                  0*0.5    = 285

Therefore the expected long run profits are

$140,000

$305,000

$285,000

Based on his selected option being either to build new or to expand, the most profitable option is to expand

=$305,000

EVPI = EPPI-EMV =$170,000

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