Question
A company has just received some 'state of the art' electronic equipment from an overseas supplier. The packaging has been damaged during delivery and the
A company has just received some 'state of the art' electronic equipment from an overseas supplier. The packaging has been damaged during delivery and the company must decide whether to accept the equipment. If the equipment itself has not been damaged, it could be sold for a profit of $10 000. However, if the batch is accepted and it turns out to be damaged, a loss of -$5000 will be made. Rejection of the equipment will lead to no change in the company's profit. After a cursory inspection, the company's engineer estimates that there is a 60% chance that the equipment has not been damaged. The company has another option. The equipment could be tested by a local specialist company. Their test, however, is not perfectly reliable and has only an 80% chance of giving a correct indication.
Find the expected value of the imperfect information.
I calculated the expected value: 10,000(.6) + -5,000(.4)
= 6,000 + (-2,000) = $4,000.
Making my second decision tree, I obtained an Expected Value of Perfect Information (EVPI) = $400. I'm unsure if my EVPI is correct so I'm unsure how to proceed to the Expected Value of Imperfect Information (EVII)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started