Exercise 1.

DECISION TREES, EVPI and EVMI

Teratex, a textile company that has a productive experience in the foreign market of 25
years, must decide if it manufactures a new product in its main plant, or if on the contrary
the purchase from an external supplier. The profits depend on the demand of the product.
The table shows projected profits, in millions of dollars.

According to the corresponding information in Table 1 and the Predicted Value of Perfect
Information (EVPI) theory, the Expected Value of Sample Information (EVMI) and Decision
Trees, respond:

a. Use EVPI to determine if the company should try to get a better estimate of the
demand.
La decisión recomendada por el método del valor esperado es fabricar como un pago de 355 Millones
de dólares.
EVPI = EVwPI – EvwoPI
EVwPI = (0,35x355) + (0,355x361) + (0,3x381) = 357,9
EVwoPI = 355
EVPI = 357,9 – 355 = 2,9 = 3
 P
b. A test market study of potential product demand is expected to report a favorable
(F) or unfavorable (U) condition. The relevant conditional probabilities are:

B
P ( A i) x P ( )
Ai
( Ai ) =
P( B)

Donde:
P ( A i )=Probabilidad a priori
B
P( ) Ai
=Probabilidad condicional

P ( B )=Probabilidad total
A
( )
P i =Probabilidad a posteriori
B

P(A1) = 0,35 P(A2) = 0,35 P(A3) = 0,3

VE (Nodo 4) = 349,03
VE (Nodo 5) = 357,97
VE (Nodo 6) = 353,77
VE (Nodo 7) = 345,64
VE (Nodo 8) = 355,48
VE (Nodo 9) = 350
Favorable (Nodo 2) = Max (Nodo4, Nodo5, Nodo6) = 367,97
Desfavorable (Nodo 3) = Max (Nodo7, Nodo8, Nodo9) = 355,48

c. What is the expected value of market research information?

VE (Nodo1) = (0,362*367,97) + (0,638*355,48) = 360,001
d. What is the efficiency of the information?

Valor de la información perfecta:

VEIM = VecIM – VesIM = 360,001 - 355 = 5,001
E = (VEIM/VEIP) x 100 = (5,001 / 3) x 100 = 166,7 %

Exercise 2. DECISION TREES, EVPI and EVMI

ElectroCom, a company that manufactures electronic components for the introduction in

its product catalog, must decide whether to manufacture a new product in its main plant,
subcontract it with company supervision or if it buys it from an external supplier. The
profits depend on the demand of the product. The table shows projected profits, in millions
of dollars.

According to the corresponding information in Table 2 and the Predicted Value of Perfect
Information (EVPI) theory, the Expected Value of Sample Information (EVMI) and Decision
Trees, respond:
a. Use EVPI to determine if the company should try to get a better estimate of the
demand.
b. A test market study of potential product demand is expected to report a favorable
(F) or unfavorable (U) condition. The relevant conditional probabilities are:

c. What is the expected value of market research information?

d. What is the efficiency of the information?
Exercise 3. DECISION TREES, EVPI and EVMI

Teratextyl, a textile company that has a productive experience in the foreign market of
30 years, must decide if it manufactures a new product in its main plant, or if on the
contrary the purchase from an external supplier. The profits depend on the demand of
the product. The table shows projected profits, in millions of dollars.

According to the corresponding information in Table 3 and the Predicted Value of Perfect
Information (EVPI) theory, the Expected Value of Sample Information (EVMI) and Decision
Trees, respond:
a. Use EVPI to determine if the company should try to get a better estimate of the
demand.
b. A test market study of potential product demand is expected to report a favorable
(F) or unfavorable (U) condition. The relevant conditional probabilities are:

c. What is the expected value of market research information?

d. What is the efficiency of the information?