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Decision Analysis: EMV & EVPI

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An investor is to purchase one of three types of real estate. The investor must decide among an apartment building, an office building, and a warehouse. The future states of nature that will determine how much profit the investor will make are good economic conditions and poor economic conditions. The profits that will result from each decision in the event of each state of nature are shown above.

Payoff Table

Good Economic Poor Economic
Conditions Conditions
Decision (Purchase) 50% 50%
Apartment building $65,000 $30,000
Office building 1,00,000 -40,000
Warehouse 30,000 10,000

Q-8a: Which investment has the highest EMV?

Q-8b: What is the expected value of perfect information in this problem?

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Solution Summary

The solution provides a step by step method for the calculation of expected monetary value and expected value of perfect information. Relevant workings are also included.