Problem: Payoff Tables (Expected Values) & EVPI - Germain Ltd.
Germain Industrial Products Ltd. manufactures and sells machine tools.Currently, Germain is considering whether to implement a computerized direct ordering servicefor its customers. The existing average contribution margin per order is $140 and Germain's totalfixed costs are $26 million per year. The company believes that if it implements the new servicewithout any loss of clients it could charge $10 more per order. The incremental costs of theordering service would be $3 per order plus $1,500,000 per year to lease the required equipment.The marketing manager has estimated two probable levels of production and sales for the comingyear. She believes that there is a 70% chance that Germain will have 200,000 orders and a 30%chance of having 300,000 orders. A marketing research firm has offered to do a survey that candetermine, with certainty, which level of orders Germain will have in the coming year.The company executive has to decide how much (if anything) it should pay for the marketresearch information.
Required:
a) Calculate the amount that Germain would be willing to pay (if anything) for the perfectinformation about orders in the coming year.
b) Explain the limitations of your method of analysis in part a).