Question

XYZ Manufaturing company has hired a new VP (D.A.King) for managing capacity investment decisions. Mr. King reviews the situation after he comes on board and decides that he can invest in Batch manufacturing, Custom manufacturing or Group technology. Mr. King will not be able to forecast demand accurately till after the technology choices are made. Demand will be classified into four scenarios: poor, fair, good and excellent. The table below indicates the payoffs for each combination of technology choice and demand scenario.

	POOR	FAIR	GOOD	EXCELLENT
PROBABILITY	0.1	0.4	0.3	0.2
Batch	- $200,000	$1,000,000	$1,200,000	$1,300,000
Custom	$100,000	$300,000	$700,000	$800,000
Group Technology	- $1,000,000	-$500,000	$500,000	$2,000,000

What is the expected monetary value of choosing the Group Technology option?

What is the expected monetary value of choosing the Batchoption?

What is the BEST decision based on expected monetary value?

What is the EVPI = Expected Value of Perfect Information?

Answer 1

The formula for EMV is shown in the formula bar.