Assignment 1 & Memo – (55 Marks)
You want to start your own coffee shop but you have no idea how big it should be. Your profit calculations for
each coffee shop size related to a good, fair and poor market are reflected in the table below in 1000’s. For
instance if you are considering a very large coffee shop in poor market conditions you will make a loss of
R55 000.
Good Fair Poor
Size of the
Market Market Market
Coffee
(Rands) (Rands) (Rands)
shop
Small 50 20 –10
Medium 80 30 –20
Large 100 60 –40
Very Large 150 25 –55
To make a meaningful decision, you are taking the following decision criteria’s into account.
a. What will your decision be based on the MAXIMAX criterion? (5)
b. What will your decision be based on the MAXIMIN criterion? (5)
c. What will your decision be based on the Equally likely criterion? (5)
d. What will your decision be based on the criterion of realism using α=0.4? (5)
e. What will your decision be based on the MINIMAX criterion using the Opportunity loss table? (17)
f. What will your decision be based on the EMV criteria using probabilities for
a Good market = 0.5, Fair market = 0.4 and a Poor market = 0.1.? (5)
g. Will you pay R10 000 for additional information? (8)
Use Expected Value of Perfect Information (EVPI) calculation to support your answer.
h. What will your decision be based on the Expected Opportunity Loss (EOL)? Use MINIMAX table (5)
CMPG322
Answer – Question1:
The values in the table are in 1,000s.
CRITERION OF
EQUALLY REALISM
MARKE MAXIMAX MAXIMIN LIKELY
Decision α=0.8
T (c)
(a) (b)
(d)
Good Fair Poor Row Max. Row Min. Row Ave. Weighted Ave.
Alternatives
Small 50 20 –10 50 –10(b) 20 14
Medium 80 30 –20 80 –20 30 20
Large 100 60 –40 100 –40 40(c) 16
Very Large 150 25 –55 150 (a) –55 40 (c) 27(d)
a. Maximax decision: Very large station.
b. Maximin decision: Small station.
c. Equally likely decision: Very large station.
d. Criterion of realism decision with α=0.8:
Small Station= (50x0.4) + (0.6x-10) = 14
Medium Station= (80x0.4) + (0.6x-20) = 20
Large Station= (100x0.4) + (0.6x-40) = 16
Very large station = (150x0.4) + (0.6x-55) = 27
e. Opportunity loss table (Minimax regret) (values in the table are in 1,000s):
MARKE MINIMA
T X
Decision Good Fair Poor Row
Alternative Market Market Market Min
s
Small 100 40 0 100
Medium 70 30 10 70
Large 50 0 30 50
Very Large 0 35 45 45
- Minimax regret = Very large plant.
CMPG322
f. EMV table for Good market = 0.5, Fair market = 0.4, Poor market = 0.1.
MARKE EMV
Decision
T
Good Fair Poor
Alternatives
Small 50 20 –10 32
Medium 80 30 –20 50
Large 100 60 –40 70
Very Large 150 25 –55 79.5
Probabilities 0.5 0.4 0.1
EMV for : Small Station= (50x0.5)+(0.4x20)+(.1x-10)=32
Medium Station= (80x0.5)+(0.4x30)+(.1x-20) =50
Large Station= (100x0.5)+(0.4x60)+(.1x-40)=70
Very large station = (150x0.5)+(0.4x25)+(.1x-55)=79.5
g. Calculate the Expected Value of Perfect Information (EVPI). Additional information for
R10 000.00
MARKE EMV
Decision
T
Good Fair Poor
Alternatives
Small 50 20 –10 32
Medium 80 30 –20 50
Large 100 60 –40 70
Very Large 150 25 –55 79.5
With perfect
150 60 -10 98
info
Probabilities 0.5 0.4 0.1
EVPI = EVWPI – MAXIMUM EMV
EVWPI = (150X0.5)+(60X0.4)+(-10X0.1) = R98.00
EVPI = 98 000 – 79500 = 18500
Yes. Consider to pay R10 000 for additional information.
CMPG322
h. Calculate the Expected Opportunity Loss (EOL). Use MINIMAX table.
MARKE EOL
T
Decision Good Fair Poor Row
Alternatives Market Market Market Min
Small 100 40 0 66
Medium 70 30 10 48
Large 50 0 30 28
Very Large 0 35 45 18.5
Probabilitie
0.5 0.4 0.1
s
EOL for : Small Station= (100x0.5) + (0.4x40) + (.1x0) = 66
Medium Station= (70x0.5) + (0.4x30) + (.1x10) = 48
Large Station= (50x0.5) + (0.4x0) + (.1x30) = 28
Very large station = (0x0.5) + (0.4x35) + (.1x45) = 18.5
Total : 55
CMPG322
