1. PrecisionManufacturing, Inc. plans to open a new plant in Missouri. Thecompany can open a full-sized plant now or a medium-sized plant nowor a small-sized plant now depending on the levels of futuredemand. The future demand levels may be high, medium, or low. Thefollowing table gives the estimated annual income for each decisionalternative under each level of future demand:
DECISION ALTERNATIVES | STATES OF NATURE (Future Demand Levels) |
High Demand | Medium Demand | Low Demand |
Full-sized plant now | $1,000,000 | $500,000 | -$300,000 |
Medium-sized plant now | $900,000 | $600,000 | -$150,000 |
Small-sized plant now | $400,000 | $280,000 | -$125,000 |
a. Whichdecision alternative should Precision Manufacturing select usingthe MAXIMAX approach? What is the corresponding annual income?
b. Whichdecision alternative should Precision Manufacturing select usingthe MAXIMIN approach? What is the corresponding annual income?
c. Whichdecision alternative should Precision Manufacturing select usingthe Laplace (or equally likely) approach? What is the correspondingannualincome?
Precision’s analysis resulted in thefollowing probabilities for the three future demand levels:P(high demand) = 0.70; P(medium demand) = 0.20;and P(low demand) = 0.10.
d. Construct adecision tree for this problem.
e. Ifmaximum expected monetary value (EMV) is used as the decisioncriterion, which decision alternative should PrecisionManufacturing select? What is the corresponding expected annualincome?
f. Suppose a marketing research firm is trying to sell the perfectinformation about the future demand to Precision Manufacturing,which will help Precision select the best alternative. What wouldbe the expected value of perfect information (EVPI) forPrecision?
If the marketing research firm were asking $39,000 for theperfect information, would you advise Precision to buy theinformation? Explain yourreasoning.
