The research and development manager for Beck Company is trying to decide whether the company should fund the development of a new lubricant. It is assumed that the project will be either a major technical success, a minor success or a failure. The company has estimated the value of a major success is $150,000, since the lubricant can be used in a number of products the company is making. If the project is a minor success, its value is $10,000 since Beck feels that the knowledge gained will benefit some other ongoing projects. If the project is a failure, it will cost the company $100,000. Based on the opinion of the scientists involved and the manager’s own subjective assessment, the assigned prior probabilities are: P (major success) = 0.15 P (minor success) = 0.45 P (failure) = 0.40
a) Construct an opportunity cost (i.e., regret) table.
b) Determine the optimal action using the maximin, maximax, Hurwicz (W = 0.4) and minimax regret criteria.
c) Determine the optimal action using the expected value and expected regret criteria.
d) Calculate the ERPI and EVPI.