Question

A company needs to determine whether to build a small or large new store. Based on the management team's estimate, the chance of the future market being poor, average, or excellent, as well as the return from each decision (small or large) under each market scenario is given in the table below. The managers want to make the decision of wheter to build a small or a large new store using the decision tree model. The decision tree corrresponding to the described scenario is given below. Apply the numbers in the table to run the decision tree model assessment by answering the folloiwng questions.

(1) The expected return of building the small new store =  (round to one decimal point)

(2) The expected return of building the large new store =  (round to one decimal point)

(3) The choice based on the above analysis is to build the  (Click to select)  small  large  store.

(4) The EVPI (Expected Value of Perfect Information) =  (round to one decimal point)

	Poor	Average	Excellent
Probability	0.2	0.3	0.5
small store	15	30	50
large store	-50	20	105

Answer 1

		Small Store			Large Store
Scenario	Probability	Return	Expected Return		Return	Expected Return
A	B	C	D = C*B		E	F = E*B
Poor	0.2	15	3		-50	-10
Average	0.3	30	9		20	6
Excellent	0.5	50	25		105	52.5
Expected Return			37			48.5

Expected Return on Building Small Store = 37

Expected Return on Building Large Store = 48.5

It is advisaabe to opt Large Strore as is is giving the higher return.

Value of Inflormation = 48.5 - 37 = 11.5