Answer:
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.
