Your friend Tom has been appointed as a manager at Bankable Bank. The bank has been experiencing some problems and losing customers. It's stock price has also gone down. Tom has been trying to leave the bank and has looked at three other bank's as alternatives i.e The Big Bank, The Best Bank and the Moolah Bank. 

At Bankable Bank , as part of his promotion to management, Tom has been tasked to get the bank up to its's five star rating and as an incentive is offered some stock by the bank. He wants to be a shareholder and thinks he could negotiate the same offer with the other banks but is not savvy with the number implications. He has been overwhelmed and has called you as an Operations Research and Mathematical Modeling expert to assist him with all of this.

Tom is deciding whether or not to Invest in stock at Bankable bank or at The Big Bank . The total cost of stock is R1 million at Bankable Bank and R2 million at the Big Bank. If he invests at Bankable Bank, however, and stock keeps falling he will lose R10 million and will decided to leave Bankable Bank and invest his money in stock at The Big Bank. Tom thinks there is a 15% chance that Bankable Bank's stock will fall. For R100 000, Tom can hire a financial expert to analyze the stock projections at Bankable Bank. He will predict that the stock price will either rise or fall. 

The financial experts past record indicates that he will predict a stock price fall 90% of the events for which the price will actually fall and a rise in the stock price on 80% of the events for which the stock price will actually rise. 

Is it worth it for Tom to hire the financial expert?

Neatly draw your decision Tree analysis and clearly all your probability calculations? Also find the EVSI and EVPI?

Answer rating: 100% (QA)

This is a decision analysis problem so we should consider using Expected Monetary Value EMV along with Expected Value of Sample Information EVSI and the Expected Value of Perfect Information EVPI Firs... View the full answer