Question 5.p.5: Compute the EVPI using the information from the previous pro...
Compute the EVPI using the information from the previous problem.
Using Formula 5S-1, the EVPI is the expected payoff under certainty minus the maximum expected value. The expected payoff under certainty involves multiplying the best payoff in each column by the column probability and then summing those amounts. The best payoff in the first column is 4, and the best in the second is 14. Thus,
Expected payoff under certainty = .60(4) +.40(14) = 8.00
Then
EVP = 8.00 − 6.20 = 1.80
(This agrees with the result obtained in Solved Problem 3b.)
Excel solution: (5.p.5)
Placing the problem data in the cell positions shown, the expected monetary value (EMV) for each alternative is shown in column J.
Then, the overall EMV is obtained in column L as the maximum of the values in L5, L6, and L7.
The EVPI is obtained using the Opportunity Loss Table as the minimum EOL value in J14, J15, and J16.
