Reference no: EM131180845

An orange grower in Florida faces a dilemma. The weather forecast is for cold weather and there is a 50% chance that the temperature tonight will be cold and destroy his entire crop which is worth some $50,000. He can take two possible actions to try to alleviate his loss if the temperature drops. First he could set burners in the orchard, this would cost $5000, but he could still incur damage of approximately $15000 to $20000. Second, he could set up sprinklers to spray the trees. If the temperature drops, the water could freeze on the fruit and provide insulation. This method is cheaper ($2,000), but less effective. With the sprinklers he could expect to incur as much as $25000 to $30,000 of the loss with no protective action. Assume that the grower's loss incurred with the burners would be $17,500 and that the loss incurred with the sprinkler would be $27,500. Find the EVPI for the weather conditions Now assume that the loss with the burners is uniformly distributed between $15,000 and $20,000. Also, assume that the loss incurred with the sprinklers is uniformly distributed between $25,000 and $30,000. Now estimate EVPI regarding the losses, under the assumption that a better weather forecast cannot be obtained. Do you think the farmer should put more effort into learning his costs more precisely or should he concentrate on obtaining better weather forecasts?