Question

MJ Logistics has decided to build a new warehouse to support its supply chain activities. They have the option of building either a large warehouse or a small one.

Construction costs for the large facility are R8 million versus R5 million for the small facility. The profit (excluding construction cost) depends on the volume of work the company expects to contract for in the future.

This is summarized below (in millions of rands):

large warehouse -

High Volume =35

Low Volume = 20

Small Warehouse

high volume= R15

low volume = R9

The company believes that there is a 60% chance that the volume of demand will be high.

a) Construct a decision tree to identify the best choice.

b) Suppose that the company engages some economic experts to provide their opinion about the future economic conditions. Historically, their upside predictions have been 75% accurate, while their downside predictions have been 90% accurate. Determine the best strategy if their predictions suggest that the economy will improve or will deteriorate. What is the expected value of sample information (EVSI) and what is expected value of perfect information (EVPI)?

Your answers to the above will be assessed in terms of the level of communication displayed, the insights and inferences drawn, and your ability to show the implications of the factors that you have assessed and discussed. An answer that merely gives a list of events that have happened or a synopsis of a situation, without showing insight into the reasons and

Answer 1