Question
A company has just received some ‘state of the art' electronic equipment from an overseas supplier. The packaging has been damaged during delivery and the company must decide whether to accept the equipment.
If the equipment itself has not been damaged, it could be sold for a pro?t of $10000. However, if the batch is accepted and it turns out to be damaged, a loss of-$5000 will be made.
Rejection of the equipment will lead to no change in the company's pro?t. After a cursory inspection, the company's engineer estimates that there is a 60% chance that the equipment has not been damaged. The company has another option.
The equipment could be tested by a local specialist company. Their test, however, is not perfectly reliable and has only an 80% chance of giving a correct indication.
How much would it be worth paying for the information from the test? (Assume that the company's objective is to maximize expected pro?t.)