Suppose that in Problem 37 a forecasting study determines that the probabilities of demand volume are Low 5 0.2, Medium 5 0.2, and HighÂ 5 0.6. Use the Excel template Decision Analysis to determine the expected value decision. How appropriate is it to use this criterion? Interpret EVPI, the expected value of perfect information.
Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, while the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years.
Given the uncertainty associated with the demand volume, and no other information to work with, how would you make a decision? Use the Excel template Decision Analysis and explain your reasoning.