As shown in the table below where the demand level is composed of two states only (Low and High) and an estimate of their probabilities is given, answer the following questions. Show your work

		Demand Level
	Probability	0.20	0.80
		Low	High
Alternative	Large Capacity	($5,000)	$25,000
	Average Capacity	$5,000	$20,000
	Small Capacity	$4,000	$9,000
Net Profits

1. 
   
2. Using Excel, create an X,Y plot the expected-value lines for the three alternatives on a graph. Label the graph completely and clearly. 

2. Is there any alternative that would never be appropriate in terms of maximizing expected profit? Explain on the basis of your graph in part a. 

3. Over what range of P(High Demand) would alternative Large Capacity be the best choice if the goal is to maximize expected profit? Over what range of P(High Demand) would alternative Average Capacity be the best choice if the goal is to maximize expected profit?

4. Using the probability of High Demand as 0.80 (therefore probability of Low Demand = 0.20), compute the expected payoffs of each of the alternatives. Show work. Using the expected payoff criterion, which of the alternatives will you recommend? 

5. Using the probability of High Demand as 0.80 (therefore probability of Low Demand = 0.20), compute the EVPI. Show work. Explain the significance of this number (i. what does it mean in terms of decision-making on the alternatives? How is this information to be used?). 

6. Using the sensitivity analysis approach, how confident will you be in building a large capacity operation? Do not express an opinion. Support your answer with the analysis above. 

Answer rating: 100% (QA)

Solution a b There is no alternative that would never be appropriate c Let required probability of H... View the full answer