MGMT2050 – Session 9 – Class Activity 3
Payoff table
Sell 10,000 units
Sell 100,000 units
Produce & Market
Sell rights
Sensitivity analysis:
Step 1: What is the EV equation for Produce and Market when
P (the probability of selling 10,000) is a variable: _____________________________________
Step 2: What is the EV equation for Sell Rights: _____________________________________________
Develop a sensitivity graph to represent the EV as a function of P (the probability of selling 10,000 units).
EV
P
Find the intersection point:
Between what range of probabilities of selling 10,000 units would you choose to Produce and Market?
Sell the Rights?
DECISION
Produce and Market
Sell Rights
PROBABILITY RANGE
MGMT2050 – Session 9 – Class Activity 4
Management of Silicon Dynamics is now considering doing full-fledged market research at a cost of $1
million to predict which of the two levels of demand is likely to occur. (Given P(sell 10,000)=0.6)
Record the
probabilities and
outcome from the
original tree diagram
(activity #1)
Sell 10,000
Sell 100,000
0.6
0.
Sell 10,000 units
Sell 100,000 units
54
Payoff table
Produce & Market
0
Sell rights
15
15
Find EVPI (VOPI) for this problem. Does the answer indicate that it might be worthwhile to perform this
market research?
Find: EVw/oPI = Max EV from original problem
= Max EV(EVw/oPI) = 0*0.6+54*0.4
= 21.6
EVwPI=0.6*15*0.4*54
= 30.6
VOPI = EVwPI - EVw/oPI = ___30.6______ - _______21.6_____ = _______9____
Conclusion: $9 million in the upper bound that we are willing to pay for any type of
information.
MGMT2050 – Session 9 – Class Activity 5
Remember the Real Estate Problem?
Investment
Alternatives
Population Growth
Slow
Average
High
Probability
0.2
0.3
0.5
Apartment
-$75,000
$10,000
$150,000
Mall
$15,000
$30,000
$75,000
Office
-$200,000
$50,000
$100,000
Compute the Value of Perfect Information!
VOPI = EVwPI - EVw/oPI = _________ - ____________ = ___________
Find: EVw/oPI = Max EV from original problem = ____________________
Find: EVwPI = ____________________
(hint: use the clairvoyant)
Option 2: Regret Table
Investment
Alternatives
Population Growth
Slow
Average
High
Probability
0.2
0.3
0.5
Apartment
Mall
Office
Min EV of Regret ___________
EV of
Regret