Orange Incs RD team just finished the prototype of a new cel

Orange Inc.\'s R&D; team just finished the prototype of a new cell phone named e-phone. The management team is considering whether to launch this new product to the national market. Among Orange Inc.\'s past products, 60% succeeded in the national market (in other words, 40% failed). It is estimated that if e-phone succeeds in the national market, then it will bring Orange a $5 million profit. However, if e-phone fails in the national market, then Orange will experience a $2 million loss. Of course Orange has the option of not launching e-phone, which will result in no gain/loss. What is Orange\'s estimated expected payoff for launching e-phone to the US market? (Enter the answer in million dollars. For example, if the answer is 1.8 million dollars, then simply enter 1.8.) What is the maximum amount that Orange would be willing to pay to gain market information? (Enter the answer in million dollars.)

Solution

a) Estimated Expected payoff

= Probability(Success)*Profit+ Probability (failure)*Loss

=5*0.6-2*0.4 [treating loss as - profit]

=3-0.8

=2.2. This is expected payoff of Orange.

Since we have the perfect informaton here

The EVPI is 2.2 here.