Problem:
XYZ Coating Company has reviewed four new processes for improving its coating line. The four processes, labeled A, B, C, and D, use different technology and have different capacities. All have the same level of production and lifetime.
The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.3 probability of Acceptance Level 1, 0.4 chance of Acceptance Level 2, 0.2 chance of Acceptance Level 3, and 0.1 chance of Acceptance Level 4.
|
Consumer Acceptance Level (states of nature)
|
|
1
|
2
|
3
|
4
|
|
Alternative A
|
-100
|
-10
|
150
|
220
|
|
Alternative B
|
30
|
50
|
80
|
130
|
|
Alternative C
|
50
|
50
|
70
|
60
|
|
Alternative D
|
70
|
80
|
70
|
60
|
Required:
Question 1)
Using the criterion of expected monetary value, which production alternative should be chosen? Solve the problem and show step by step calculations.