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Nganunu Corporation, (NC), purchased land that will be a site of a new luxury double storey complex. The location provides a spectacular view of the surrounding countryside, including mountains and rivers. NC plans to price the individual units between R300 000 and R1 400 000. NC commissioned preliminary architectural drawings for three different projects: one with 30 units, one with 60 units and one with 90 units. The financial success of the project depends upon the size of the complex and the chance event concerning the demand of the units. The statement of the decision problem is to select the size of the new complex that will lead to the largest profit given the uncertainty concerning the demand of for the units. The information for the NC case (in terms of action and states of nature), including the corresponding payoffs can be summarised as follows: Alternative Decision Probability Small Complex (D1) Medium Complex (D2) Large Complex (D3) States of Nature Strong Demand (SD) Weak Demand (WD) 0.8 0.2 8 7 14 5 20 -9 The management of NC is considering a six-month market research study designed to learn more about the potential market's acceptance of the NC project. Suppose that the company engages some economic experts to provide their opinion about the potential market's acceptance of the NC project. Historically, their upside predictions have been 94% accurate, while their downside predictions have been 65% accurate. a) Using decision trees, determine the best strategy i. if Nganunu does not use experts ii. if Nganunu uses experts. b) What is the expected value of sample information (EVSI)? c) What is expected value of perfect information (EVPI)? Nganunu Corporation, (NC), purchased land that will be a site of a new luxury double storey complex. The location provides a spectacular view of the surrounding countryside, including mountains and rivers. NC plans to price the individual units between R300 000 and R1 400 000. NC commissioned preliminary architectural drawings for three different projects: one with 30 units, one with 60 units and one with 90 units. The financial success of the project depends upon the size of the complex and the chance event concerning the demand of the units. The statement of the decision problem is to select the size of the new complex that will lead to the largest profit given the uncertainty concerning the demand of for the units. The information for the NC case (in terms of action and states of nature), including the corresponding payoffs can be summarised as follows: Alternative Decision Probability Small Complex (D1) Medium Complex (D2) Large Complex (D3) States of Nature Strong Demand (SD) Weak Demand (WD) 0.8 0.2 8 7 14 5 20 -9 The management of NC is considering a six-month market research study designed to learn more about the potential market's acceptance of the NC project. Suppose that the company engages some economic experts to provide their opinion about the potential market's acceptance of the NC project. Historically, their upside predictions have been 94% accurate, while their downside predictions have been 65% accurate. a) Using decision trees, determine the best strategy i. if Nganunu does not use experts ii. if Nganunu uses experts. b) What is the expected value of sample information (EVSI)? c) What is expected value of perfect information (EVPI)?
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Lets approach this problem step by step a Using Decision Trees to Determine the Best Strategy For each alternative and states of nature we will calcul... View the full answer
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