Determine the expected value of perfect information

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Reference no: EM131843684

Ji-Yon Oh is thinking of her career option after graduating with a bachelor degree. She already got ajob offer from Iron Rice-container Company, and also got admitted to Ph.D. course in Purdue University. The Iron Rice-container Company offered her an annual salary of $50,000.

If she decided to go to Ph.D. course, she has a 70% of chance of being successful in Ph.D. course. There would be no cog for completing Ph.D. course study only if she succeeded. If she failed in Ph.D. course, then Purdue University will charge tuitions and scholarships, which is amount of $100,000; she has to pay back to the

university, then she will get ajob at Iron Rice-container Company with an annual salary of $60,000. Even though she succeeds in Ph.D. course, she is not guaranteed to receive a high salary.

If she succeeded in research, there is a 40% chance her research topic will be a trend, in which her expected salary will be $160,000, and a 60% chance that her research topic will be obsolete, where her expected salary will be $90,000.

Moreover, she also has to decide - in the event of her success in Ph.D. - whether she should decide get a job in academic area or industrial area. If she gets ajob in academic area, her salary will be 5% more than the expected salary ($160,000 in the case her research topic is on trend, $90,000 in the now her research topic is obsolete). Her premium percentages to the expected salary when she gets ajob in industrial area are primary dependent on two market conditions.

Market Conditions Premium percentages Probability

Good 50./0 0.4

Bad -30% 0.6

Suppose her decision is only dependent on her first annual salary minus corresponding cost (if exists) when she will get ajob; that is, you ignore the opportunity cost of getting ajob at Iron-Rice-container Company if she decided to go to Ph.D. (which takes five years); and also ignore time-value of money.

a) What decision she has to make for maximizing her annual salary? Answer using decision tree approach.

b) Determine the Expected Value of Perfect Information (EVPI) for the conditions of her succeeded or failed in Ph.D. course. Answer this question with a decision tree.

Reference no: EM131843684

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