The health care manager is quite concerned about the recent deterioration of a section of the building that houses her urgent care operations. According to her analyst assistant, four options merit her consideration:
(A) a new building,
(B) major structural renovation,
(C) moderate renovation, and
(D) minor renovations.
Moreover, three possible weather conditions could affect the costs of fixing the building within the next six months. Good weather condition has a probability of 0.40; moderate weather with rain has a probability of 0.35, and bad weather has a probability of 0.25.
If good weather materializes,
(A) will cost $ 215,000;
(B) will cost $ 120,000;
(C) will cost $ 90,000; and
(D) will cost $ 56,000.
If moderate weather materializes, the costs will be
$ 255,000 for (A);
$ 145,500 for (B);
$ 98,000 for (C); and
$ 75,000 for (D).
If bad weather materializes, the costs will be
$ 316,000 for (A);
$ 214,000 for (B);
123,000 for (C); and
$ 119,000 for (D).
a. Build a payoff table.
b. Draw a decision tree for this problem. (Show cost outcomes, probabilities, and EMV for each event node.)
c. Using expected monetary value (rollback procedure), which alternative should be chosen?
d. Calculate and interpret the expected value of perfect information.