PLEASE ANSWER QUESTIONS 1-3. I ALREADY KNOW EXPECTED VALUE, BUT I DONT UNDERSTAND THE DIFFERENCE BETWEEN EXPECTED VALUE
Posted: Fri Jul 01, 2022 9:08 am
PLEASE ANSWER QUESTIONS 1-3. I ALREADY KNOW EXPECTEDVALUE, BUT I DONT UNDERSTAND THE DIFFERENCE BETWEEN EXPECTED VALUEAND NET VALUE. PLEASE PROVIDE ANSWERS
Expando, Inc., is considering the possibility of building anadditional factory that would produce a new addition to its productline. The company is currently considering two options. The firstis a small facility that it could build at a cost of $6 million. Ifdemand for new products is low, the company expects to receive $10million in discounted revenues (present value of future revenues)with the small facility. On the other hand, if demand is high, itexpects $12 million in discounted revenues using the smallfacility. The second option is to build a large factory at a costof $9 million. Were demand to be low, the company would expect $10million in discounted revenues with the large plant. If demand ishigh, the company estimates that the discounted revenues would be$14 million. In either case, the probability of demand being highis 0.40, and the probability of it being low is 0.60. Notconstructing a new factory would result in no additional revenuebeing generated because the current factories cannot produce thesenew products.
The following decision tree describes the problem to helpExpando make the best decision.
This was the answer I was given before, it does notanswer my question. Please answer question 1-3 in order. I want toclearly see the expected value AND the net value of the twooptions.
EMV= sum of product of expected probability* payoff- cost
EMV for Build Small Factory=0.4*12+0.6*10-6
EMV for Build Small Factory=4.8 million
EMV for Build large factory==0.4*14+0.6*10-9
EMV for Build large factory=2.6 million
As we can see that EMV for Build large factory< EMV for Buildsmall factory
So the best decision is to go for Build small factory
Build Small Factory Build Large Factory High growth P = .40 Low growth P = .60 Do Nothing, EV = $0 High growth P = .40 Low growth P = .60 $12.0 million $10.0 million $14.0 million $10.0 million
Expando, Inc., is considering the possibility of building anadditional factory that would produce a new addition to its productline. The company is currently considering two options. The firstis a small facility that it could build at a cost of $6 million. Ifdemand for new products is low, the company expects to receive $10million in discounted revenues (present value of future revenues)with the small facility. On the other hand, if demand is high, itexpects $12 million in discounted revenues using the smallfacility. The second option is to build a large factory at a costof $9 million. Were demand to be low, the company would expect $10million in discounted revenues with the large plant. If demand ishigh, the company estimates that the discounted revenues would be$14 million. In either case, the probability of demand being highis 0.40, and the probability of it being low is 0.60. Notconstructing a new factory would result in no additional revenuebeing generated because the current factories cannot produce thesenew products.
The following decision tree describes the problem to helpExpando make the best decision.
- Please Answer Questions 1 3 I Already Know Expected Value But I Dont Understand The Difference Between Expected Value 1 (305.9 KiB) Viewed 76 times
EMV= sum of product of expected probability* payoff- cost
EMV for Build Small Factory=0.4*12+0.6*10-6
EMV for Build Small Factory=4.8 million
EMV for Build large factory==0.4*14+0.6*10-9
EMV for Build large factory=2.6 million
As we can see that EMV for Build large factory< EMV for Buildsmall factory
So the best decision is to go for Build small factory
Build Small Factory Build Large Factory High growth P = .40 Low growth P = .60 Do Nothing, EV = $0 High growth P = .40 Low growth P = .60 $12.0 million $10.0 million $14.0 million $10.0 million