Question
A food processing company has imported some expensive machinery from an overseas supplier. The packaging has been damaged during delivery and the company must decide
A food processing company has imported some expensive machinery from an overseas supplier. The packaging has been damaged during delivery and the company must decide whether or not to accept the equipment. If the contents of the package are undamaged, it could result in a profit of $15,000 for the company. But if the company accepts the equipment and it turns out to be damaged, it will result in a loss of -$7000. Rejection of the machinery will keep the company's profit unchanged. Upon inspection of the package, the company's engineer believes that the chances of the machinery being undamaged is 65%. The company has another option- they can perform a high-level test (before making a decision on the acceptance of the machinery) without fully installing the machinery in their factory. However, this test has to be outsourced to another company and is only 75% accurate. How much would it be worth paying for the information from the test, assuming that the company's objective is to maximize expected profit?
P(Test says damaged when the equipment is actually damaged) = 0.75 P(Test says undamaged when the equipment is actually undamaged) = 0.75
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