Question
Northern Beverages is considering producing a new product, Orangeaid. The company estimates that the annual demand for Orangeaid, (in thousands of cases), has the following
Northern Beverages is considering producing a new product, Orangeaid. The company estimates that the annual demand for Orangeaid, (in thousands of cases), has the following probability distribution: P(D=30) = 0.5, P(D=55) = 0.4 and P(D=80) = 0.1. Each case of Orangeaid sells for $5 and incurs a variable cost of $3.50. It costs $750,000 to build a plant to produce Orangeaid. Assume that if $1 is received every year (forever), this is equivalent to receiving $10 now. Considering the reward for each action and state of the world to be in terms of net present value, use the following decision criterion to determine whether Northern Beverages should build the plant using:
(a) Maximin.
(b) Maximax.
(c) Minimax regret.
(d) Expected value.
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