A machine shop specializing in industrial pumps is experiencing a substantial backlog, and the shop’s management is considering three courses of action:
• Arrange for subcontracting (A)
• Construct new facilities (B)
• Donothing(C)
The correct choice depends largely upon demand. which may be low, medium, or high. By consensus. management estimates the respective demand probabilities as 0.2, 0.5, and 0.3. The management estimates the profits when choosing from the three alternatives (A. B. and C) under the differing probable levels of demand. These profits are already expressed in terms of NPW.

(a) Which option would you recommend based on the expected monetary value (EMV) criterion? (Assume that you are a risk neutral person so that you are interested in maximizing the expected monetary value.)
(b) How much would you be willing to pay to know the true stale of nature?

(c) Suppose a market survey can be undertaken with the following reliability (values obtained from past experience where actual demand was compared with predictions made by the market survey). Favorable prediction means that there would be sufficient demand for the product in the market place.

Determine the strategy that maximizes the expected payoff after taking the market survey. In doing so. compute the EVPI after taking the survey. What is the true worth of the market survey?

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Event A B C NPW (in $100,000) Medium 50 25 40 Low 10 -120 20 High 90 200 60