An entrepreneur wants to determine whether it would be profitable to establish a gardening service
in a local suburb. The entrepreneur believes that there are four possible levels of demand for this
gardening service:
Very low demand—1% of the households would use the service.
Low demand—5% of the households would use the service.
Moderate demand—10% of the households would use the service.
High demand—25% of the households would use the service.
Based on past experiences in other suburbs, the entrepreneur assigns the following probabilities to
the various demand levels:
P (Very low demand) = 0.20
P (Low demand) = 0.50
P (Moderate demand) = 0.20
P (High demand) = 0.10
The entrepreneur has calculated the following profits or losses (K) of this garden service
for each demand level (over a period of one year):
Demand
ACTION
Provide Garden Service Do not Provide Garden Service
Very Low -50,000 0
Low 60,000 0
Moderate 130,000 0
High 300,000 0
(a) Construct a decision tree.
(b) Construct an opportunity loss table.
(c) Compute the expected monetary value (EMV) for offering this garden service.
(d) Compute the expected opportunity loss (EOL) for offering this garden service.
(e) Explain the meaning of the expected value of perfect information (EVPI) in this
problem.
(f) Compute the coefficient of variation (CV) for offering this garden service.
(g) Compute the return-to-risk ratio (RTRR) for offering this garden service.
(h) Based on the results of (c), should the entrepreneur offer this garden service? Why?
(i) Based on the results of (d), should the entrepreneur offer this garden service? Why?
(j) Based on the results of (f), should the entrepreneur offer this garden service? Why?
(k) Based on the results of (g), should the entrepreneur offer this garden service? Why