Question

QUESTION 1 The ABC Co. is considering a new consumer product. They believe there is a probability of 0.30 that the XYZ CO. Will come out with a competitive product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product their expected profit is $45.000: if they add an assembly line and XYZ does follow they still expect a 512.000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $450,000: if XYZ does compete for this market, ABC expects a loss of 580.000. ABC does nothing XYZ does nothing (a) Determine the EMV of each decision (b) Determine the EOL of each decision Compare the results of (a) and (b). (d) Calculate the EVPL TT TT Paragraph Ariel 3/12pt) E. E. T... GI %DOQOFEZETT. ---

Answer 1

a,Let X=proability XYZ offers a competitng product.Then EMV(assembly line)=

$12,000*x+$45,000*(1-x)

EMV addition=$80,000*x+$450,000*(1-x)

or

$12,000*x+$45,000*(1-x)=$80,000*x+450,000*(1-x)

$12,000*x-$45,000*x+$45,000=$80,000*x-$450,000*x+$450,000

-$35,000*x+$462,000*x=$450,000-$45,000

$427000*x=$405000

Then x=$405000/42700=0.9484

If the probility XYZ will offer a competing product is estimated is 0.9484 then ABC is indiiferent between two alternatives

b,Expected opportunity loss:

min EOL decision =max EMV decision

c,Tthen ABC is indiiferent between two alternatives If the probability that XYZ will offer a competing product is estimated to be less than 0.9484, then ABC should invest addition

D,Expected value of perfect information=EPPI-EMV