Question

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. What is the EVSI for this problem (in $ million)?

Answer 1

					(P1*P2)	V	(P*V)
			P1	P2	P	Value	EV
Favorable	Large	High	0.63	0.92	0.5796	190	110.124
		Low	0.63	0.08	0.0504	75	3.78
	Small	High	0.63	0.92	0.5796	98	56.8008
		Low	0.63	0.08	0.0504	93	4.6872
Unfavorable	Large	High	0.37	0.3	0.111	190	21.09
		Low	0.37	0.7	0.259	75	19.425
	Small	High	0.37	0.3	0.111	98	10.878
		Low	0.37	0.7	0.259	93	24.087
						Large	154.419
						Small	96.453

So with information of sample the best outcome is build Large and EVSI = 154.42 Million

As compared to previous of 154.35 Million

So the

With Info	Without Info	Diff
154.42	154.35	0.07

So there is an additional value of 0.07 Million.