Risk Analysis and the Value of Information

Sue Reynolds has to decide if she should get information (at cost of $300,000) to invest in retail store. if she gets the information, there is a 0.45 probability that the information will be favorable and a 0.55 probability that the information will not be favorable.If the information is favorable, there is a 0.9 probability that the store will be a success.If the information is not favorable the probability of a successful store is only 0.2 without any information,sue estimates that the probability of a successful store will be 0.6 A successful store will give a return of $120,000. if the store is built but is not successful,Sue will see a loss of $90,000. of course, she could always decide not to build the retail store.

1) construct a decision tree.
2) what do you recommend?

© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/business-management/risk-analysis-and-the-value-of-information-7eos

Solution Preview

...ate the tree structure and also to explain where the various numbers come from.

Based upon this analysis I would recommend that Ms. Reynolds refrain from buying the information and go ahead and invest in the store as the ...