Calculate the Expected Monetary Value (EMV) for different decision strategies, considering market research outcomes.

To determine the best decision strategy, we will calculate the Expected Monetary Value (EMV) for two main scenarios: without market research and with market research.

Scenario 1: Decision without Market Research

Step 1: Calculate the EMV for "Manufacture" using the prior probabilities.

$$\text{EMV}_{\text{Manufacture (No MR)}} = (400 \times 0.3) + (120 \times 0.4) + (-60 \times 0.3)$$ $$= 120 + 48 - 18 = \text{N}150$$

Step 2: Calculate the EMV for "Purchase" using the prior probabilities.

$$\text{EMV}_{\text{Purchase (No MR)}} = (280 \times 0.3) + (160 \times 0.4) + (40 \times 0.3)$$ $$= 84 + 64 + 12 = \text{N}160$$

Step 3: Compare the EMVs without market research.
The highest EMV is N160 (for Purchase).
So, if no market research is conducted, the best action is to Purchase the component, with an EMV of N160,000.

Scenario 2: Decision with Market Research

The market research costs N20,000 (or N20 in thousands). We need to calculate the EMV for each outcome of the market research (Favourable or Unfavourable) and then combine them.

Step 4: Calculate EMVs if market research is Favourable (F), P(F) = 0.40.

• If Favourable, decide between Manufacture and Purchase:
  • EMV for Manufacture given Favourable research: $$\text{EMV}_{\text{Manufacture | F}} = (400 \times \text{P(H|F)}) + (120 \times \text{P(M|F)}) + (-60 \times \text{P(L|F)})$$ $$= (400 \times 0.45) + (120 \times 0.40) + (-60 \times 0.15)$$ $$= 180 + 48 - 9 = \text{N}219$$
  • EMV for Purchase given Favourable research: $$\text{EMV}_{\text{Purchase | F}} = (280 \times \text{P(H|F)}) + (160 \times \text{P(M|F)}) + (40 \times \text{P(L|F)})$$ $$= (280 \times 0.45) + (160 \times 0.40) + (40 \times 0.15)$$ $$= 126 + 64 + 6 = \text{N}196$$
  • If market research is Favourable, the best action is to Manufacture (EMV = N219,000).

Step 5: Calculate EMVs if market research is Unfavourable (U), P(U) = 0.60.

• If Unfavourable, decide between Manufacture and Purchase:
  • EMV for Manufacture given Unfavourable research: $$\text{EMV}_{\text{Manufacture | U}} = (400 \times \text{P(H|U)}) + (120 \times \text{P(M|U)}) + (-60 \times \text{P(L|U)})$$ $$= (400 \times 0.20) + (120 \times 0.40) + (-60 \times 0.40)$$ $$= 80 + 48 - 24 = \text{N}104$$
  • EMV for Purchase given Unfavourable research: $$EMV_{Purchase | U} = (280 \times P(H|U)) + (160 \times P(M|U)) + (40$$