Christopher Rany is thinking of buying a warehouse for $5 million. Assuming he borrows the money, he expects to incur an annual cost of $500,000 to service his debt, plus an additional cost of $200,000 per year to run the new venture. At a contemplated delivery fee of $100 (per delivery. This will be a revenue source for Christopher), the probabilities are 0.10, 0.50, and 0.40, respectively, that 6,000 deliveries, 7,000 deliveries, or 8,000 deliveries will occur per year.
Use a decision tree to determine Christopher’s optimal action, given his desire to maximize expected monetary value and given the option not to make the investment at all.

a). Identify the random events, decisions and results for the given decision problem.
b). Create a payoff table for the given decision problem.
c). Draw the Influence Diagram and the Decision Tree for the given decision problem.
d). Should Christopher buy the warehouse? Determine the optimal decision and the expected profit.
e). Determine the maximum amount of money Christopher would be willing to spend in order to have the perfect information regarding the state of nature (Find EVPI). Disregarding the probabilities,determine the optimal decision using
f). Maximin criterion
g). Maximax criterion
h). Minimax regret criterion

Answer rating: 100% (QA)

Answer Given below a Random events delivery requests for 60007000 or 8000 units Decision Buying a wa... View the full answer