Dr. Nott is considering investing in a waste treatment plant. Returns depend on the size of plant and the market condition for the facility. From experience, Nott believes that a small size would yield a $500,000 return regardless of the market scenario. However, the success of a medium sized plant would depend on the market. A low market demand for waste treatment would bring a $100,000 return. A medium market demand would yield a $500,000 return, and a high demand would return $800,000. While a large facility is much riskier, the potential return is much greater. With a high market demand, the large facility should return a million dollars. With a medium demand, the large facility will only return $500,000. Also, Nott estimates that the large facility would be a big failure if there is a low demand for waste treatment. He estimates that he would lose approximately $300,000 with a large treatment facility if demand was indeed low.
At present time, Dr. Nott estimates that the probability of a low demand for waste treatment is 0.28, the probabilities of a medium and high demand are 0.27 and 0.45, respectively. An economic survey may be performed to obtain more information and get a better feeling for the probability of a low, medium, or high demand market with the cost of $50,000. The survey could result in only 2 possible indications of High and Low. Regards the historical data, given a high market demand, the probability of High: Low indication from the survey is 14:1. On the other hand, with a medium market demand, the probability of High: Low conclusion from the survey is 7:2. The probability of High: Low indication from the survey is 1:3.
a) Draw decision tree and advise Dr. Nott
b) What is the value of EVSI and its efficiency?
All papers you get at efficientpapers.com are meant for research purposes only. The papers are not supposed to be submitted for academic credit.
