Case Problem: Klean Corporation Waste Management. The Klean Corporation is involved with waste management. During the past 10 years it has become one of the largest waste disposal companies in Eastern Canada, serving primarily Quebec and Ontario. Chris Klean, president of the company, is considering the possibility of establishing a waste treatment plant in British Columbia. From past experience, Chris believes that a small plant in Southern B. C. would yield a $500 000 profit regardless of the market for the facility. The success of a mid-size waste treatment plant would depend on the market. With a low demand for waste treatment, Chris expects a $100 000 return. A medium demand would yield a $600 000 return in Chris's estimation, and a high demand would return $800 000. A large facility is much riskier and because of its size would also be subject to a mandatory environmental review. Such a review has the potential of stopping the building of the large facility project. If the result of the environmental review is unfavorable, Klean would have no choice, due to the delay, but to cancel the project and abandon any further work on waste facilities in British Columbia ( $0 net return). If the large facility is given the go-ahead (environmental review is favorable), the estimated return with high demand would be a 1.4 million dollars. With a medium demand, the large facility should return $400 000. But Chris estimates that the large facility would be a big loser if there is a low demand for waste treatment. He estimates that he would lose approximately $200 000 with a large treatment facility if demand is indeed low. Chris is fairly confident that the probability of an unfavorable environmental review would only be about 0.25. Looking at the economic conditions for the southern part of the province of British Columbia and using his experience in the field, Chris estimates that the probability of a low demand for treatment plants is 0.15. The probability of a medium-demand for a waste treatment facility is approximately 0.35, and the probability of a high demand for a waste treatment facility is 0.5. Because of the large potential investment and the possibility of a loss, Chris has decided to hire a market research firm Humber Research and Optimization that is based in Brampton, ON. This firm will perform a survey to get a better feeling for the probability of a low, medium, or high demand for a waste treatment facility. The cost of the survey is $35 000 and the survey will have two possible outcomes: positive, indicating market conditions favorable for the new facility BC or negative, indicating market conditions unfavorable for the new facility in BC. To help Chris determine whether to go ahead with the survey, the Humber R&O has provided Chris with information regarding its performance on the past surveys. This information is presented in the form of conditional probabilities in the following table. Note that some of the entries in the table were not legible on the computer printout and needed to be recovered. Table of conditional probabilities provided by Humber R&O: P ( survey results | possible outcomes) To help Chris determine whether to go ahead with the survey, the Humber R&O has provided Chris with information regarding its performance on the past surveys. This information is presented in the form of conditional probabilities in the following table. Note that some of the entries in the table were not legible on the computer printout and needed to be recovered. Table of conditional probabilities provided by Humber R&O: P ( survey results | possible outcomes) Actual Outcomes Results of Survey Low demand (L) Medium demand(M) High demand(H) 0.8 0.1 Positive (survey predicts favorable market) Negative (survey predicts unfavorable market) 0.9 0.5 What should Chris do? Managerial Report Perform an analysis of the problem facing the Klean Corporation, and prepare a report that summarizes your findings and recommendations. Use the TreePlan Excel Add-In. Include the following items in your report. [marks] are indicated in the square brackets. [1] a) A brief overview of the decision facing Klean Corporation. [6] b) A decision tree without the additional information provided by market research firm. State the recommendation and the expected monetary value of this recommendation. [9] c) Construct a revised decision tree with additional information from Humber R&O. Be sure to show: The calculation of the posterior(revised) probabilities (keep 3 decimal places). State completely the optimal decision. State the expected monetary value of the optimal decision. [3] d) What is the value of the sample information provided by Humber R&O.? Should Chris use the market research company services? Why? [1] e) Comment on the use of decision theory to assist with the solution to this problem. Case Problem: Klean Corporation Waste Management. The Klean Corporation is involved with waste management. During the past 10 years it has become one of the largest waste disposal companies in Eastern Canada, serving primarily Quebec and Ontario. Chris Klean, president of the company, is considering the possibility of establishing a waste treatment plant in British Columbia. From past experience, Chris believes that a small plant in Southern B. C. would yield a $500 000 profit regardless of the market for the facility. The success of a mid-size waste treatment plant would depend on the market. With a low demand for waste treatment, Chris expects a $100 000 return. A medium demand would yield a $600 000 return in Chris's estimation, and a high demand would return $800 000. A large facility is much riskier and because of its size would also be subject to a mandatory environmental review. Such a review has the potential of stopping the building of the large facility project. If the result of the environmental review is unfavorable, Klean would have no choice, due to the delay, but to cancel the project and abandon any further work on waste facilities in British Columbia ( $0 net return). If the large facility is given the go-ahead (environmental review is favorable), the estimated return with high demand would be a 1.4 million dollars. With a medium demand, the large facility should return $400 000. But Chris estimates that the large facility would be a big loser if there is a low demand for waste treatment. He estimates that he would lose approximately $200 000 with a large treatment facility if demand is indeed low. Chris is fairly confident that the probability of an unfavorable environmental review would only be about 0.25. Looking at the economic conditions for the southern part of the province of British Columbia and using his experience in the field, Chris estimates that the probability of a low demand for treatment plants is 0.15. The probability of a medium-demand for a waste treatment facility is approximately 0.35, and the probability of a high demand for a waste treatment facility is 0.5. Because of the large potential investment and the possibility of a loss, Chris has decided to hire a market research firm Humber Research and Optimization that is based in Brampton, ON. This firm will perform a survey to get a better feeling for the probability of a low, medium, or high demand for a waste treatment facility. The cost of the survey is $35 000 and the survey will have two possible outcomes: positive, indicating market conditions favorable for the new facility BC or negative, indicating market conditions unfavorable for the new facility in BC. To help Chris determine whether to go ahead with the survey, the Humber R&O has provided Chris with information regarding its performance on the past surveys. This information is presented in the form of conditional probabilities in the following table. Note that some of the entries in the table were not legible on the computer printout and needed to be recovered. Table of conditional probabilities provided by Humber R&O: P ( survey results | possible outcomes) To help Chris determine whether to go ahead with the survey, the Humber R&O has provided Chris with information regarding its performance on the past surveys. This information is presented in the form of conditional probabilities in the following table. Note that some of the entries in the table were not legible on the computer printout and needed to be recovered. Table of conditional probabilities provided by Humber R&O: P ( survey results | possible outcomes) Actual Outcomes Results of Survey Low demand (L) Medium demand(M) High demand(H) 0.8 0.1 Positive (survey predicts favorable market) Negative (survey predicts unfavorable market) 0.9 0.5 What should Chris do? Managerial Report Perform an analysis of the problem facing the Klean Corporation, and prepare a report that summarizes your findings and recommendations. Use the TreePlan Excel Add-In. Include the following items in your report. [marks] are indicated in the square brackets. [1] a) A brief overview of the decision facing Klean Corporation. [6] b) A decision tree without the additional information provided by market research firm. State the recommendation and the expected monetary value of this recommendation. [9] c) Construct a revised decision tree with additional information from Humber R&O. Be sure to show: The calculation of the posterior(revised) probabilities (keep 3 decimal places). State completely the optimal decision. State the expected monetary value of the optimal decision. [3] d) What is the value of the sample information provided by Humber R&O.? Should Chris use the market research company services? Why? [1] e) Comment on the use of decision theory to assist with the solution to this