After some extensive studies, and initials designs, the estimated net present values of the payoff(net return) in millions(OMR) for the three alternatives, at three different scenario levels of future polyehtylene demand, are as shown in Table Q2a. After a further market study was performed, the company developed some probability estimates for the market outcome shown in Table Q2b.

(i) Develop a decision tree analysis and decide on what would be the preferred or best alternative.

(ii) Determine the expected value of perfect information EVPI. How is this interpreted?

(iii) After further discussions, management came up with the following modified situation:

1.) If the grassroots alternative were selected, and the market demand were high, the company had an option to expand the capacity.

In this case, the estimated payoff would be 125 million OMR instead of 100 million OMR.

2.) If the joint venture alternative were selected, and the market demand were high, the company had an option to increase its percentage

share in the joint venture. In this case, the estimated payoff would be 65 Million OMR instead of 45 million OMR.

Use decision trees to illustrate the preferred decision for management.

(iv) What is the expected value of the perfect information for the modified situation preesnted in section (iii)

Table Q2a : Payoff in Million OMR
Project decision	Low market	Stable market demand	High market
	demand		demand
Grassroots	-39	50	100
Expansion	-23	57	83
Joint venture	15	44	45
Table Q2b: Probability in Percent
Future Market	Low market	Stable market demand	High market
	demand		demand
Probability (%)	20	37	43

Answer rating: 100% (QA)

Joint venture CHrass roots Expansion High Joint Grass acot Expansion venture High LOW with ... View the full answer