DARIO EDUARDO RINCON GUTIERREZ

PROBLEM 1. DECISION TREES, EVPI AND EVM

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

Table 1. Decision process for the commercialization of the product

States of nature
Decision alternative Demand low utility Demand low average utility
Manufacture 51 57
Subcontrac 55 59
Buy 53 57
Probabilities ∑=1 0.35 0.40

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:

P(F/low) = 0,25 P(D/low) = 0,75

P(F/low average) = 0,38 P(D/ low average) = 0,62
P(F/high medium) = 0,4 P(D/ high medium) = 0,6
P(F/high) = 0,5 P(D/high) = 0,5

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

d. What is the efficiency of the information?

DECISIONS TREE
PROBABILITY
0.35
0.40
MANUFACTURE NODE 2

0.25
0.35
0.40
NODE 1 SUBCONTRAC NODE 3
 NODE 1 SUBCONTRAC NODE 3

0.25
0.35
0.40
BUY NODE 4

0.25

Expected value is obtained= VEsIP

Node 1= (Max node 2 vs node 3 vs node 4)

56.4
NODE 2
Millons of dolars

58.6
NODE 3
Millons of dolars

56.6
NODE 4
�(�_�∕ 〖� )= 〗 Millons of dolars
(�(�∕�_� )�(�_�))/(�(�))

TEOREMA BAYES

P(s1)= 0,35
P(s2)= 0,4
P(s3)= 0,25

P(F/low) = 0.25
P(F/low average) = 0.38
P(F/high medium) = 0.4
P(F/high) = 0.5

FAVORABLE

STATE OF NATURE PREVIOUS CONDITIONAL

PROBABILITIES P(Sj) PROBABILITIES P(F/Sj)
 LOW 0.35 0.25
HIGH MEDIUM 0.40 0.4
HIGH 0.25 0.5
P(F)

P(D/low) = 0.75
P(D/low average) = 0.62
P(D/high medium) = 0.6
P(D/high) = 0.5

UNFAVORABLE

STATE OF NATURE PREVIOUS CONDITIONAL

PROBABILITIES P(Sj) PROBABILITIES P(D/Sj)
LOW 0.35 0.75
HIGH MEDIUM 0.40 0.6
HIGH 0.25 0.5
P(F)

PROBABILITY
0.23
MANUFACTURE NODE 4 0.43
0.34
FAVORABLE
0.23
SUBCONTRAC NODE 5 0.43
0.34
0.23
0.37 BUY NODE 6 0.43
0.34

PROBABILITY
0.42
MANUFACTURE NODE 7 0.38
0.20
UNFAVORABLE
0.42
SUBCONTRAC NODE 8 0.38
0.20
0.42
0.63 BUY NODE 9 0.38
0.20
 Value of perfect information: VEIM= l VEcIM - VEsIM l

VEcIM= 58.61 millions of dollars

VEsIM= 58.6 millions of dollars
𝑽𝑬𝑰�/𝑽
𝑬𝑰�
VEIM 0.01

E= (𝟎,𝟎�)/ X 100
𝟎

E= X 100 = EFFICIENCY OF 0%
ERREZ

, EVPI AND EVMI

oreign market of 25 years, must decide if it

urchase from an external supplier. The profits
ected profits, in millions of dollars.

zation of the product

of nature
Demand high medium utility
63
63
61
0.25

le

CISIONS TREE
DEMAND
51 17.85
56.40
57 22.8
Millons of
63 15.75 dolars
55 19.25
58.60
59 23.6
 Millons of
63 15.75 dolars
53 18.55
56.60
57 22.8
Millons of
61 15.25 dolars

VEIP= [VEcIP - VEsIP]

Expected value with perfect information

Expected value without perfect information
THE BEST DECISION 58.6
MILLONS OF DOLARS
VEcIP= (0,35)*55+(0,4)*59+(0,25)*63
VEcIP= 58,6 millions of dollars

VEIP= [58,6 - 58,6] = 0

OREMA BAYES

P(F/low) = 0,25 P(D/low) = 0,75

P(F/low average) = 0,38 P(D/ low average) = 0,62
P(F/high medium) = 0,4 P(D/ high medium) = 0,6
P(F/high) = 0,5 P(D/high) = 0,5

ORABLE

JOINT PROBABILITIES P(F n Sj) LATER PROBABILITIES

P(Sj/F)
 0.09 0.23
0.16 0.43
0.13 0.34
0.37

AVORABLE

JOINT PROBABILITIES P(D n Sj) LATER PROBABILITIES

P(Sj/D)
0.26 0.42
0.24 0.38
0.13 0.20
0.63

DEMAND
51 11.98
57 24.48 57.60
63 21.14
55 12.92
59 25.34 59.40 21.98
63 21.14
53 12.45
57 24.48 57.40
61 20.47

DEMAND
51 21.33
57 21.80 55.69
63 12.55
55 23.01
59 22.57 58.12 36.62
63 12.55
53 22.17
57 21.80 56.12
61 12.15
58.60
 DARIO EDUARDO RINCON GUTIERREZ

PROBLEM 2. DECISION TREES, EVPI AND E

ElectroCom, a company that manufactures electronic components for the introduction in its product catalog, must decide
its main plant, subcontract it with company supervision or if it buys it from an external supplier. The profits depend on the
projected profits, in millions of dollars.

Table 2. Decision process for the commercialization of the product

Decision States of nature
alternative Demand low-utility Demand low average-utility
Manufacture 115 122
Subcontrac 121 128
Buy 122 131
Outsource 125 128
Probabilities ∑=1 0.21 0.28

e. Use EVPI to determine if the company should try to get a better estimate of the
demand.
f. A test market study of potential product demand is expected to report a favorable (F) or unfavorable (U) co

P(F/low) = 0,2 P(D/low) = 0,8

P(F/low average) = 0,3 P(D/ low average) = 0,7
P(F/high medium) = 0,35 P(D/ high medium) = 0,65
P(F/high) = 0,5 P(D/high) = 0,5

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

h. What is the efficiency of the information?

DECISIONS TREE
PROBABILITY
0.21
0.28
MANUFACTURE NODE 2
0.29
0.22
0.21
0.28
SUBCONTRAC NODE 3
0.29

NODE 1
 SUBCONTRAC NODE 3

0.22
NODE 1
0.21
0.28
BUY NODE 4
0.29
0.22
0.21
0.28
OUTSOURCE NODE 5
0.29
0.22

Expected value is obtained= VEsIP

Node 1= (Max node 2 vs node 3 vs node 4 vs node 5)
MANUFACTURE NODE 2 127.91
SUBCONTRAC NODE 3 132.73
BUY NODE 4 133.78
OUTSOURCE NODE 5 130.95

TEOREMA BAYES

�(�_�∕ 〖� )= 〗
(�(�∕�_� )�(�_�))/(�(�))

P(F/ low) P(F/low average)

Probabilities ∑=1 0.21 0.28
FAVORABLE 0.2 0.3
UNFAVORABLE 0.8 0.7

FAVORABLE
STATE OF PREVIOUS PROBABILITIES CONDITIONAL
NATURE P(Sj) PROBABILITIES P(F/Sj)
LOW 0.21 0.2
LOW AVERAGE 0.28 0.3
HIGH MEDIUM 0.29 0.35
 HIGH 0.22 0.5
P(F)

UNFAVORABLE
STATE OF PREVIOUS PROBABILITIES CONDITIONAL
NATURE P(Sj) PROBABILITIES P(F/Sj)
LOW 0.21 0.8
LOW AVERAGE 0.28 0.7
HIGH MEDIUM 0.29 0.65
HIGH 0.22 0.5
P(F)

PROBABILITY
0.12
0.25
MANUFACTURE NODE 4
0.30
0.33
FAVORABLE
0.12
0.25
SUBCONTRAC NODE 5
0.30
0.33
0.12
0.25
BUY NODE 6
0.30
0.33
0.34
0.12
0.25
OUTSOURCE NODE 7
0.30
0.33

PROBABILITY
0.25
0.30
MANUFACTURE NODE 8
0.28
0.17
UNFAVORABLE
0.25
0.30
SUBCONTRAC NODE 9
0.28
0.17
 0.25
0.30
BUY NODE 10
0.28
0.17
0.66
0.25
0.30
OUTSOURCE NODE 11
0.28
0.17

Value of perfect information: VEIM= l VEcIM - VEsIM l

VEcIM= 133.78 millions of dollars

VEsIM= 122.00 millions of dollars

VEIM 11.78

E= 𝑽𝑬𝑰�/𝑽𝑬𝑰� X 100

(��,𝟕𝟖)/(�,𝟎𝟕)
E= X 100= 1100.9345794393

EFFICIENCY OF 1100.93%
 EDUARDO RINCON GUTIERREZ

N TREES, EVPI AND EVMI

oduction in its product catalog, must decide whether to manufacture a new product in
external supplier. The profits depend on the demand of the product. The table shows
s, in millions of dollars.

he commercialization of the product

States of nature
Demand high medium-utility Demand high-utility
130 145
138 143
138 143
132 139
0.29 0.22

mate of the

rt a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are:

ECISIONS TREE
DEMAND
115 24.15
122 34.16
127.91
130 37.7
145 31.9
121 25.41
128 35.84
132.73
138 40.02
 132.73

143 31.46
122 25.62
131 36.68
133.78
138 40.02
143 31.46
125 26.25
128 35.84
130.95
132 38.28
139 30.58

VEIP= [VEcIP - VEsIP]

THE BEST DECISION 133.78 MILLONS OF DOLARS Expected value with perfect information
Expected value without perfect information

VEcIP= (0,21)*125+(0,28)*131+(0,29)*138+(0,22)*145
VEcIP = 134,85 millions of dollars

VEIP= [134,85 - 133,78] = 1,07 millions of dollars

OREMA BAYES

P(F/low) = 0,2 P(D/low) = 0,8

P(F/low average) = 0,3 P(D/ low average) = 0,7
P(F/high medium) = 0,35 P(D/ high medium) = 0,65
P(F/high) = 0,5 P(D/high) = 0,5

P(F/high medium) P(F/high)

0.29 0.22
0.35 0.5
0.65 0.5

VORABLE

JOINT PROBABILITIES P(F n Sj) LATER PROBABILITIES

P(Sj/F)
0.04 0.12
0.08 0.25
0.10 0.30
 0.11 0.33
0.34

AVORABLE

JOINT PROBABILITIES P(F n Sj) LATER PROBABILITIES

P(Sj/F)
0.17 0.25
0.20 0.30
0.19 0.28
0.11 0.17
0.66

DEMAND
115 14.31
122 30.36
131.03
130 39.10
145 47.26
121 15.06
128 31.86
135.03
138 41.50
143 46.61
122 15.18
131 32.60
135.90 45.87
138 41.50
143 46.61
125 15.56
128 31.86
132.41
132 39.70
139 45.30

DEMAND
115 29.16
122 36.09
126.32
130 36.99
145 24.08
121 30.68
128 37.87
131.56
138 39.26
143 23.74
122 30.94
131 38.76
132.70 87.92
138 39.26
143 23.74
125 31.70
128 37.87
130.20
132 37.56
139 23.08
*131+(0,29)*138+(0,22)*145
millions of dollars

= 1,07 millions of dollars

133.78
 DARIO EDUARDO RINCON GUTIERREZ

PROBLEM 3. DECISION TRE

Teratextyl, a textile company that has a productive experience in the foreign market of 30 years, must decide if it manufa
on the demand of the product. The table sh

Table 3. Decision process for the commercialization of the product

States of nature
Decision alternative
Demand low-utility Demand low average-utility
Manufacture 85 87
Subcontrac 78 81
Buy 82 85
Lease 83 85
Outsource 85 87
Probabilities ∑=1 0.3 0.22

i. Use EVPI to determine if the company should try to get a better estimate of the
demand.
j. A test market study of potential product demand is expected to report a favorable (F) or unfavorable (U) co

P(F/low) = 0,22 P(D/low) = 0,78

P(F/low average) = 0,4 P(D/ low average) = 0,6
P(F/high medium) = 0,33 P(D/ high medium) = 0,67
P(F/high) = 0,42 P(D/high) = 0,58

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

l. What is the efficiency of the information?

DECISIONS TREE
PROBABILITY
0.3
0.22
MANUFACTURE NODE 2
0.25
0.23
 0.3
0.22
SUBCONTRAC NODE 3
0.25
0.23
0.3
0.22
NODE 1 BUY NODE 4
0.25
0.23
0.3
0.22
LEASE NODE 5
0.25
0.23
0.3
0.22
OUTSOURCE NODE 6
0.25
0.23

Expected value is obtained= VEsIP

Node 1= (Max node 2 vs node 3 vs node 4 vs node 5 vs node 6)
MANUFACTURE NODE 2 89.24
SUBCONTRAC NODE 3 82.94
BUY NODE 4 85.75
LEASE NODE 5 86.28
OUTSOURCE NODE 6 88.28

TEOREMA BAYES

�(�_�∕ 〖� )= 〗
(�(�∕�_� )�(�_�))/(�(�))

P(F/ low) P(F/low average)

Probabilities ∑=1 0.3 0.22
FAVORABLE 0.22 0.4
UNFAVORABLE 0.78 0.6
 FAVORABLE

CONDITIONAL
STATE OF NATURE PREVIOUS PROBABILITIES P(F/Sj)
PROBABILITIES P(Sj)
LOW 0.3 0.22
LOW AVERAGE 0.22 0.4
HIGH MEDIUM 0.25 0.33
HIGH 0.23 0.42
P(F)

UNFAVORABLE

CONDITIONAL
STATE OF NATURE PREVIOUS PROBABILITIES P(F/Sj)
PROBABILITIES P(Sj)
LOW 0.3 0.78
LOW AVERAGE 0.22 0.6
HIGH MEDIUM 0.25 0.67
HIGH 0.23 0.58
P(F)

PROBABILITY
0.20
0.26
MANUFACTURE NODE 5
0.25
0.29
FAVORABLE
0.20
0.26
SUBCONTRAC NODE 6
0.25
0.29
0.20
0.26
BUY NODE 7
0.25
0.29
0.20
0.26
0.33 OUTSOURCE NODE 8
0.25
0.29
0.20
0.26
OUTSOURCE NODE 9
 OUTSOURCE NODE 9
0.25
0.29

PROBABILITY
0.20
0.26
MANUFACTURE NODE 10
0.25
0.29
UNFAVORABLE
0.20
0.26
SUBCONTRAC NODE 11
0.25
0.29
0.20
0.26
BUY NODE 12
0.25
0.29
0.20
0.26
0.67 OUTSOURCE NODE 13
0.25
0.29
0.20
0.26
OUTSOURCE NODE 14
0.25
0.29

Value of perfect information: VEIM= l VEcIM - VEsIM l

VEcIM= 89.91 millions of dollars

VEsIM= 89.24 millions of dollars

VEIM 0.67

E= 𝑽𝑬𝑰�/𝑽𝑬𝑰� X 100

(𝟎.𝟔𝟕)/(𝟎.𝟎)
E= X 100=
UARDO RINCON GUTIERREZ

EM 3. DECISION TREES, EVPI AND EVMI

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 d
on the demand of the product. The table shows projected profits, in millions of dollars.

ommercialization of the product

States of nature
Demand high medium-utility Demand high-utility
91 95
85 89
87 90
87 91
89 93
0.25 0.23

mate of the

ort a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are:

SIONS TREE
DEMAND
85 25.5
87 19.14
89.24
91 22.75
95 21.85
 78 23.4
81 17.82
82.94
85 21.25
89 20.47
82 24.6
85 18.7
85.75
87 21.75
90 20.7
83 24.9
85 18.7
86.28
87 21.75
91 20.93
85 25.5
87 19.14
88.28
89 22.25
93 21.39

VEIP= [VEcIP - VEsIP]

THE BEST DECISION 89.24 MILLONS OF DOLARS
Expected value with perfect information
Expected value without perfect information

VEcIP= (0,3)*85+(0,22)*87+(0.25)*91+(0,23)*95
VEcIP = 89.24 millions of dollars

VEIP= [89.24 - 89.24] = 0

EMA BAYES

P(F/low) = 0,22 P(D/low) = 0,78

P(F/low average) = 0,4 P(D/ low average) = 0.6
P(F/high medium) = 0,33 P(D/ high medium) = 0,67
P(F/high) = 0,42 P(D/high) = 0,58

P(F/high medium) P(F/high)

0.25 0.23
0.33 0.42
0.67 0.58
 BLE

JOINT PROBABILITIES P(F n LATER

Sj) PROBABILITIES
P(Sj/F)
0.07 0.20
0.09 0.26
0.08 0.25
0.10 0.29
0.33

RABLE

JOINT PROBABILITIES P(F n LATER

Sj) PROBABILITIES
P(Sj/F)
0.23 0.35
0.13 0.20
0.17 0.25
0.13 0.20
0.67

DEMAND
85 16.84
87 22.98
89.91 29.95
91 22.54
95 27.55
78 15.45
81 21.40
83.72
85 21.05
89 25.81
82 16.25
85 22.46
86.35
87 21.55
90 26.10
83 16.45
85 22.46
86.84
87 21.55
91 26.39
85 16.84
87 22.98
88.84
 88.84
89 22.04
93 26.97

DEMAND
85 16.84
87 22.98
89.91 59.96
91 22.54
95 27.55
78 15.45
81 21.40
83.72
85 21.05
89 25.81
82 16.25
85 22.46
86.35
87 21.55
90 26.10
83 16.45
85 22.46
86.84
87 21.55
91 26.39
85 16.84
87 22.98
88.84
89 22.04
93 26.97

EFFICIENCY OF 0%
chase from an external supplier. The profits depend
cIP - VEsIP]

*87+(0.25)*91+(0,23)*95
millions of dollars

4 - 89.24] = 0
89.91