A company is considering three different capacities for the new distribution center they want to open in the Shenandoah Valley, small, medium, and large. They also have the option to not open a distribution center in this location. The returns from small, medium, and large sizes are $2,837,858, $3,902,596, and $5,978,207 respectively if the market is favorable. However, if the market is unfavorable, the losses are $1,502,704, $3,943,312, and $3,844,523 respectively. Historical data shows a probability of 0.549 for a favorable market. The company has the option to have market research to see if these probabilities are different in the current market conditions. This market research costs $96,308. In the past, market research predicted an unfavorable market with a probability of 0.579. Given a favorable prediction, a favorable market was actually observed with a probability of 0.790. Given an unfavorable prediction, a favorable market was actually observed with a probability of 0.274. Determine if the company should conduct the research or not, using a decision tree. What is the EMV of the best decision?
A company is considering three different capacities for the new distribution center they want to open in the Shenandoah Valley, small, medium, and large. They also have the option to not open a distribution center in this location. The returns from small, medium, and large sizes are $2,837,858, $3,902,596, and $5,978,207 respectively if the market is favorable. However, if the market is unfavorable, the losses are $1,502,704, $3,943,312, and $3,844,523 respectively. Historical data shows a probability of 0.549 for a favorable market. The company has the option to have
Determine if the company should conduct the research or not, using a decision tree. What is the EMV of the best decision?
Step by step
Solved in 3 steps with 1 images
