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EVPI

Here is my analysis of the problem: (a) The decision tree is shown below: Decision Tree for ABC Technologies Problem (b) Calculating the expected monetary values (EMVs) at each decision node: Develop: EMV = 0.55*£80m + 0.30*£40m + 0.15*(-£100m) = £32m Licence: EMV = 0.55*£40m + 0.30*£30m + 0.15*£0m = £27m Sell: EMV = 0.55*£25m + 0.30*£25m + 0.15

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Rafi Muhammad Rao
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70 views

EVPI

Here is my analysis of the problem: (a) The decision tree is shown below: Decision Tree for ABC Technologies Problem (b) Calculating the expected monetary values (EMVs) at each decision node: Develop: EMV = 0.55*£80m + 0.30*£40m + 0.15*(-£100m) = £32m Licence: EMV = 0.55*£40m + 0.30*£30m + 0.15*£0m = £27m Sell: EMV = 0.55*£25m + 0.30*£25m + 0.15

Uploaded by

Rafi Muhammad Rao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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You are an owner of a shop with sport equipment and

you face this decision problem: You have a great


opportunity to buy golf-gloves or sport bags,
unfortunately you don’t have enough space in your
warehouse, that’s why you have to chose only one of
these two commodities. As the winter is coming you
know that you have to sell them as soon as possible. If
you sell all the stuff during a Winter Market, you can sell
them for Price n.1, if you sell them later in your shop, you
will have to sell them for Price n.2. There is 70%
probability that you succeed to sell the gloves during
Winter Market and 40 % probability that you succeed to
sell the bags during Winter Market. Which of these
commodities would you choose to purchase, Gloves or
Bags?
Count “Expected Values

Pair of golf
Sport bags
gloves
Amount: 3000 pairs 4800 pieces
500 CZK /
Purchase: 800 CZK / pair
piece
Price n.1: 1000 CZK 750 CZK
Price n.2: 700 CZK 450 CZK
Probability of selling everything
70% 40%
during Winter market (Price n. 1)
Probability of selling everything
30% 60%
later (Price n. 2)
Perfect Information
• Perfect Information would tell us with
certainty which outcome is going to occur
• Having perfect information before making a
decision would allow choosing the best payoff
for the outcome
Payoffs in blue would be chosen based on perfect
information (knowing demand level)
Demand
Alternatives High Moderate Low
Large plant 200,000 100,000 -120,000
Small plant 90,000 50,000 -20,000
No plant 0 0 0

Probability 0.3 0.5 0.2

EVwPI = $110,000
Expected Value of Perfect Information

EVPI = EVwPI – EMV


= $110,000 - $86,000 = $24,000

• The “perfect information” increases the


expected value by $24,000
• You’ve chosen to sell one of the stuff mentioned i problem
1. Your friend Aslam, whom you know from your University
studies on MBA now works as a marketing analyst in a
Consulting company. He has perfect information for you
about preferences of customers who will be present on
Winter market. Franta asks for 100 000 CZK for his
information.

• Count “Expected Value” of a perfect information and Draw


Decision tree. How much it is worth to pay to Franta for his
information?
Decision Trees
• Can be used instead of a table to show
alternatives, outcomes, and payofffs
• Consists of nodes and arcs
• Shows the order of decisions and outcomes
Decision Tree
Folding Back a Decision Tree
• For identifying the best decision in the tree
• Work from right to left
• Calculate the expected payoff at each
outcome node
• Choose the best alternative at each decision
node (based on expected payoff)
Tree with EMV’s
Decision Trees for Multistage Decision-
Making Problems
• Multistage problems involve a sequence of
several decisions and outcomes
• It is possible for a decision to be immediately
followed by another decision
• Decision trees are best for showing the
sequential arrangement
Problem:

ABC technologies have developed a new manufacturing


process which they believe will revolutionise the
smartphone industry. They are, however, uncertain how
they should go about exploiting this advance. Initial
indications of the likely success of marketing the
process are 55%, 30%, 15% for “high success”,
“medium success” and “probable failure”, respectively.
The company has three options; they can go ahead and
develop the technology themselves, licence it or sell
the rights to it. The financial outcomes (in £ millions)
for each option are given in the table below.
High Success Medium Failure
Success
Develop 80 40 -100

Licence 40 30 0

Sell 25 25 25

(a) Draw a decision tree to represent the company’s problem.

(b) Calculate the Expected Monetary Value for all possible


decisions the company may take and hence determine the
optimal decision for the company.

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