You are a bank manager. Mr Smith has approached your bank for a million dollar loan. The bank can charge 10% interest from Mr Smith for this loan. The bank will buy government bonds at 4% interest rate in case Mr Smith's application is rejected. You think there is 10% chance that Mr Smith would default on his loan based on your knowledge about Mr Smith. At a cost of about $1000, the bank can investigate and figure out Mr Smith's complete credit history.
Based on the past performance, you know that the credit reports give a favorable credit rating 80% of the time when the customer honors loan commitments; and unfavorable credit rating 20% of the time even when the customer honors loan commitments. The credit reports give a favorable credit rating 25% of the time and an unfavorable credit rating 75% of the time when the customer does not honor loan commitments.
• Draw the decision Tree and Derive Optimal decision
• Compute Expected Value of Perfect Information
• Compute expected Value of Sample Information