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Juice Company Decision Theory: New Factory

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Juice Company is producing a new product line. The annual demand has the following probability distribution:

Annual Demand Probability
20,000 0.3
50,000 0.5
90,000 0.2

Each case of Juice sells for $5 and incurs a $3 Variable cost. it costs the company $800000 to build factory to produce this new Juice. Assume that $1 received every year forever is equivalent to receiving $10 now. Needs to read in Net present Value. Company needs to know whether to build the factory based on a pay off table and the following results:

a) Maximin and Maximax results
b) Minimax regret
c) Expected Value
d) Hurwicz (use 0.6)
d) Calculate Perfect Information

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Solution Summary

This solution contains step-by-step calculations to determine the mamimin, maximax, expected value, Hurwicz and perfect information.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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