Suppose you have a choice of three projects to choose from. Here the expected profits from these projects under the following economic scenarios: Project Poor/Fair Moderate/Stable Strong/Booming A -200 $400 $700 B -700 600 1200 C 100 500 900 Now suppose the probability of a Poor/Fair economy is 25%, a Moderate/Stable economy is 45% and there is a 30% chance for a Strong/Booming economy. A) Setup a decision tree. B) Determine the expected value (EV) for each project. What project should be selected based on the expected value approach? Why? C) Determine the expected value with perfect information about the states of nature? D) Determine the expected value without perfect information about the states of nature? E) Determine the expected value of perfect information.

Suppose you have a choice of three projects to choose from. Here the expected profits from these projects under the following economic scenarios: Project Poor/Fair Moderate/Stable Strong/Booming A -200 $400 $700 B -700 600 1200 C 100 500 900 Now suppose the probability of a Poor/Fair economy is 25%, a Moderate/Stable economy is 45% and there is a 30% chance for a Strong/Booming economy. A) Setup a decision tree. B) Determine the expected value (EV) for each project. What project should be selected based on the expected value approach? Why? C) Determine the expected value with perfect information about the states of nature? D) Determine the expected value without perfect information about the states of nature? E) Determine the expected value of perfect information.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section9.2: Elements Of Decision Analysis

Problem 1P

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