Create a payoff table that lists the profit

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Reference no: EM131015623

1. Two construction companies are bidding against one another for the right to construct a new community center building in Bloomington, Indiana. The first construction company, Fine Line Homes, believes that its competitor, Buffalo Valley Construction, will place a bid for this project according to the distribution shown in the file P06_44.xlsx. Furthermore, Fine Line Homes estimates that it will cost $160,000 for its own company to construct this building. Given its fine reputation and long-standing service within the local community, Fine Line Homes believes that it will likely be awarded the project in the event that it and Buffalo Valley Construction submit exactly the same bids. Create a payoff table that lists the profit from each Fine Line bid and each competing bid, and use it to find the bid that maximizes Fine Line's expected profit. Why is this an easier approach than a decision tree for this particular problem?

2. A nuclear power company is deciding whether to build a nuclear power plant at Diablo Canyon or at Roy Rogers City. The cost of building the power plant is $10 million at Diablo and $20 million at Roy Rogers City. If the company builds at Diablo, however, and an earthquake occurs at Diablo during the next five years, construction will be terminated and the company will lose $10 million (and will still have to build a power plant at Roy Rogers City).

Without further expert information the company believes there is a 20% chance that an earthquake will occur at Diablo during the next five years. For $1 million, a geologist can be hired to analyze the fault structure at Diablo Canyon. She will predict either that an earthquake will occur or that an earthquake will not occur. The geologist's past record indicates that she will predict an earthquake on 95% of the occasions for which an earthquake will occur and no earthquake on 90% of the occasions for which an earthquake will not occur. Should the power company hire the geologist? Also, calculate and interpret EVSI and EVPI.

Attachment:- Data.xlsx

Reference no: EM131015623

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