Determine the best strategy if their predictions suggest that the economy will improve or will deteriorate. What is the EVSI?

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MJ Logistics has decided to build a new warehouse to support its supply chain activities. They have the option of building either a large warehouse or a small one. Construction costs for the large facility are $8 million versus $5 million for the small facility. The profit (excluding construction cost) depends on the volume of work the company expects to contract for in the future. This is summarized in the table below (in millions of dollars): The company believes that there is a 60% chance that the volume of demand will be high. a. Construct a decision tree to identify the best choice. b. Suppose that the company engages some economic experts to provide their opinion about the future economic conditions. Historically, their upside predictions have been 75% accurate, while their downside predictions have been 90% accurate. Determine the best strategy if their predictions suggest that the economy will improve or will deteriorate. What is the EVSI? What is EVPI?

 

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