Howard Weiss, Inc,. is considering building a sensitive new radiation scanning device. His managers believe that there is a probability of 0.35 that the ATR Co. will come out with a competitive product. If Weiss adds an assembly line for the product and ATR Co. does not follow with a competitive product, Weiss's expected profti is $60,000; If Weiss adds an assembly line and ATR follows suit, Weiss still expects $20,000 profit. If Weiss adds a new plant addition and ATR does not produce a competitive product, Weiss expects a profit of $600,000; if ATR does compete for this market, Weiss expects a loss of $120,000.

a) Expected value for the Add Assembly Line Option=

Expected value for the Build New Plant option=

The alternative that provides Weiss the greatest expected monetary value (EMV) is

The value of the return under this decision is

b) The expected value of perfect information (EVPI) for Weiss=

Consider the following information

Probability of ATR coming up with a competitive product is 0.35

If ATR does not come up with a competitive product and H adds an assembly line, the profit is $60,000

If it adds an assembly line and ATR adds the product, the profit is $20,000

If H adds a new assembly but ATR does not come up with a competitive product, the profit is $600,000

If ATR does not enter the market, the loss for H is $120,000

A) Expected value for the add assembly line option:

The company would get a profit of $60,000 if ATR does not come up with a competitive product. If ATR comes up with a competitive product and H adds an assembly line, the profit is $20,000.

Probability of not coming up with a product is 0.65 (1-0.35)

Calculate the value if it does not come up with a new product line and H adds an assembly line as follows:

Value if it does not come up with a new product = 0.65 x $60,000

= $39,000

Calculate the value if it comes up with a new product line and H adds an assembly line as follows:

Value if it does come up with a new product = 0.35 x $20, 000 = $7,000

Calculate the expected value as follows:

Expected value = S39000 + $7000

Expected value = $46,000

Expected value for build new plant option:

If H adds a new assembly but ATR does not come up with a competitive product, the profit is $600,000

If ATR does not enter the market, the loss for H is $120,000

Calculate the value if H adds a new assembly but ATR does not come up with a competitive product as follows:

Value if it does not come up with a new product = 0.65 x $600000

= $390, 000

Calculate the value if ATR does not enter the market:

Value if it does not compete in market = 0.35 x - $120000 = - $42, 000

Calculate the expected value as follows:

Expected value = $390,000 - $42,000

Expected value = $348,000

The expected value of building a plant is more than the expected value of adding product line. Therefore, the best alternative is to build the plant.

B) Calculation of expected value of perfect information (EVPI):

EVPI = 0.65 x $600,000 + 0.35 x $120,000

EVPI = $390,000 + $42,000

EVPI = $432,000

Calculation of value of return:

Value of return = Value of perfect information - Maximum EMV

Value of return = $432,000 - 348,000

Value of return = $84,000