Question

Sam runs a factory in a mountain at high altitude where the high wattage electricity infrastructure is lacking. He needs to lease a factory-grade power generator for the year of 2021. Each of Sam’s produced product requires wattages of electricity from the generator. Sam received the following four leasing offers for the generator he needs:

Offer A: Base annual service fee is $1000. Each product Sam produces is charged $1.75 usage fee.

Offer B: Base annual service and including up to the first 500 units Sam produces is $1555. Each additional unit after the first 500 units is charged $2.10 usage fee.

Offer C: Base annual service fee is $2000. Each product Sam produces is charged $0.95 usage fee.

Offer D: There is no base annual service fee. Each product Sam produces is charged $2.95 usage fee.

Sam checks his potential product orders for year 2021 and realizes that he may produce between 175 to 1100 units depending on next year's economy. He receives the following projected probabilities for his four possible 2021 production scenarios:

Probability (Yearly Production of 175 units) = 0.15

Probability (Yearly Production of 400 units) = 0.30

Probability (Yearly Production of 800 units) = 0.45

Probability (Yearly Production of 1100 units) = 0.10

(A-1) What offer should be accepted by Sam according to the expected value approach?

(A-2) Construct a lease payment regret table and report what offer should be accepted by Sam according to the Minimax regret approach.

(A-3) What is the EVPI for this problem?

Answer 1