Question

Dwayne Whitten, president of Whitten Industries, is considering whether to build a manufacturing plant in north Texas. His decision is summarized in the following table: Alternatives Build large plant Build small plant Don't Build Market Probability Favorable Unfavorable Market Market $400,000 - $300,000 $100,000 - $10,000 $0 $0 0.30 0.70

Answer 1

A B E 1 2 3 4 Alternatives Favorable Unfavorable EMV Build large plant 400000 -300000 =SUMPRODUCT(C3:D3,$C$6:$D$6) Build small plant 100000 -10000 =SUMPRODUCT(C4:04,$C$6:$D$6) Don't build 0 0 =SUMPRODUCT(C5:05,$C$6:$D$6) Probability 0.3 0.7 Max payoff =MAX(C3:C5) =MAX(D3:05) =SUMPRODUCT(C7:07,$C$6:$D$6) 5 6 7

Alternatives	Favorable	Unfavorable	EMV
Build large plant	400,000	-300,000	-90,000
Build small plant	100,000	-10,000	23,000	<-- max EMV
Don't build	0	0	0
Probability	0.3	0.7
Max payoff	400,000	0	120,000	<-- EVwPI

a)

A decision node is a square node and chance nodes are circles. Figure-3 is the correct alternative.

b)

To maximize the expected return, the best decision is to build a small plant with max EMV = 23,000

c)

EVPI = EVwPI - max EMV = 120,000 - 23,000 = $97,000