Question

A financial executive for Fidelity Investments lives in Boston but frequently must travel to New York. She can go to New York by car, train, or plane. The cost for a plane ticket from Boston to New York is $200, and it is estimated that the trip takes 30 minutes in good weather and 45 minutes in bad weather. The cost for a train ticket is $100, and the trip takes an hour in good weather and two hours in bad weather. The cost to drive her own car from Boston to New York is $40, and this trip takes three hours in good weather and four in bad weather. The executive places a value of $60 per hour on her time. The weather forecast is for a 60% chance of bad weather tomorrow. What decision would you recommend? (Hint: Set up a payoff table, and remember that you want to minimize costs.) What is the expected value of perfect information?

Please explain in an excel format or minitab on how to compute

Answer 1

ANS.

here total payoff is ,

PLANE,

• if bad weather

               = -200 + (-60)*(0.75)

               =    -245

• if good weather,

               =    -200 + (0.5)*(60)

               =    -230

CAR,

• if bad weather

              =   -40 + 4*(-60)

              =   -280

• if good weather,

             =   -40 + 3*(-60)

             =   -220

TRAIN,

• if bad weather

               = 100 + 2*(-60)

                = -220

• if good weather,

               = -100 + (1)(-60)

               = -160

now expected payoff,

for train = 0.4*(-160) + 0.6*(-220) = -196

for car = 0.4*(-220) + 0.6(-280) = -196

for plane = 0.4(-230) + 0.6(-245) = -239

so, minimum cost is taken by train

now, expected value of perfect information (EVPI),

= EV/PI - EXPECTED PAYOFF OPTIMAL

= [0.4*(-160) + 0.6(-220)] - (-196)

= 0

hence,expected value of perfect information is (0)

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