The owner of a company that supplies home heating oil would like to determine whether to offer a solar heating installation service to its customers. The owner of the company has determined that a startup cost of $150,000 would be necessary, but a profit of $2,000 can be made on each solar heating system installed. The owner estimates the probability of various demand levels as follows:
Number of Units Installed Probability
50 0.40
100 0.30
200 0.30
a. Construct the payoff table, indicating the events and courses of action.
b. Construct the opportunity loss table. Use Excel and include your output.
c. Compute the expected monetary value (EMV) for offering this solar heating system installation service. Use Excel and include your output.
d. Compute the expected opportunity loss (EOL) for offering this solar heating system installation service. Use Excel and include your output.
e. Compute the expected value of perfect information (EVPI) and explain its meaning in this problem. Use Excel and include your output.
f. Compute the return-to-risk ratio (RTRR) for offering this solar heating installation service and explain its meaning in terms of the problem. use Excel and include your output.
g. Based on the results of the above, should the company offer this solar heating installation service? Explain your answer.