Question

Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that there is a probability of 0.45 that the ATR Co. will come out with a competitive product. I Weiss adds an assembly line for the product and ATR Co. does not follow with a competitive product, Weiss's expected profit is $50,000; if Weiss adds an assembly line and ATR follows suit, Weiss still expects $15,000 profit. If Weiss adds a new plant addition and ATR does not produce a competitive product, Weiss expects a profit of $600,000; I ATR does compete for this market, Weiss expects a loss of $100,000 a) Expected value for the Add Assembly Line option = $ 34250 (enter your answer as a whole number). Expected value for the Build New Plant option = $ 285000 (enter your answer as a whole number). The alternative that provides Weiss the greatest expected monetary value (EMV) is Build New Plant The value of the return under this decision is $(enter your answer as a whole number).

Answer 1

Solution:

Based on the information given in the question, we can summarize the given alternatives as mentioned in the below table:

Alternatives ATR Co. Competes in Market ATR Co. Doesn't Compete in Market Add Assembly Line (A1) 15000 50000 New Plant Addition (A2) -100000 600000 Probabilities 0.45 0.55

Answer a:

EMV for the add assembly line option (A1) = (15000 x 0.45) + (50000 x 0.55) = 34250 $

Answer b:

EMV for the New Plant Option (A2) = (-100000 x 0.45) + (600000 x 0.55) = 285000 $

Answer c:

The alternative that provides the highest EMV = Alternative 2 = Build New Plant

Answer d:

Value of the return under the highest EMV Alternative =

= (0.45 x 15000) + (0.55 x 600000) - 285000

= 6750 + 330000 - 285000

= 51750 $

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