CWD Winter Inc is considering entering the snowplowing busin

CWD Winter Inc is considering entering the snowplowing business for the coming winter season. CWD can purchase either a snowplow blade attachment for the station\'s pick-up truck or a new heavy-duty snowplow truck. CWD has analyzed the situation and believes that either alternative would be a profitable investment if the snowfall is heavy. Smaller profits would result if the snowfall is moderate, and losses would result if the snowfall is light. The

following profits have been determined.

CWD is willing to pay $50 for additional   information on the weather

which can be normal or unreasonable.

Decision Alternatives

Moderate,

Heavy, s₁

s₂

Light, s₃

Blade Attachment, d₁

3500

1000

-1500

New Snowplow, d₂

7000

2000

-9000

Probability

0.4

0.3

0.3

Conditional Probability For A Given State of Nature

Test Results

Heavy

Moderate

Light

Normal

0.7

0.8

0.9

Unreasonable

0.3

0.2

0.1

That is P (N/H) =0.7; P (N/M) =0.8, P(N/L) =0.9, P (U/H) =0.3; P (U/M) =0.2, P(U/L) =0.1

After you have computed the revised probabilities round to two decimal places

Construct the appropriate decision tree to help CWD make the appropriate decisions. This tree must be constructed in logical order with labels and net payoffs It also includes the revised probabilities (5 marks

Fold back the decision tree (5 marks) to determine the best strategy for CWD; you must state this strategy (1 mark). What is the final expected profit?( 1 mark)(7 marks)

What is the expected value of sample information(EVSI)- the most that should be paid to seismic testing firm for the test?( 1 mark)

d)      Calculate the expected value of perfect information (EVPI)- the most that should be paid to an expert for perfect prediction of the uncertain outcomes.(1 mark)

e)       What is the efficiency of sample information?(1 mark)

Solution