a) The development of a small driving range for golfers of all levels has long been a
Question:
a) The development of a small driving range for golfers of all levels has long been a wish of Jeremy Jenkins. He believes there is a 50/50 chance that the driving range will succeed or fail. A friend of Jeremy's suggested that he should conduct a community survey to get a better idea of the demand for such a facility. Such surveys are not perfect and will have some false negatives and false positives. A false negative occurs when the survey provides a negative signal for a company that will be successful. A false positive occurs when the survey provides a positive signal for a company that will not actually be successful. Assume that the survey will have a false negative rate of x and a false positive rate of 0.30. What should the value of x be to ensure that there is a 0.70 probability that the range will actually be successful if the survey provides a positive signal?
b) For this question, assume that x = 0.20. (The false positive rate is still 0.30.) The cost of the survey is $5000. If the driving range is successful, the net present value of the facility will be $200,000 (this figure does not include the cost of the survey). If unsuccessful, the net present value of the facility will be -$80,000 (this figure does not include the cost of the survey). Draw a decision tree and recommend the course of action for Jeremy that will maximize his expected net present value. Calculate the EVSI and EVPI for this decision situation.
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe