MyBusinessCom is inquiring whether to extend an $80,000 credit to a potential new customer. Very often, the following categories are used for the credit-worthiness of a credit seeker: poor risk, average risk, and good risk. Based on historical data, 25 percent of credit seekers similar to the new potential customer are poor risks, 50 percent are average risks, and the remaining are good risks. If credit is granted, the expected profit for poor risks is -$10,000, for average risks $15,000, and good risks $25,000. The company may consult a credit-rating organization for a fee of $7,000 per case evaluated.
(a) (4 marks) Develop a decision analysis formulation of this problem by identifying the decision alternatives, the states of nature, and the pay-off table when the credit-rating organization is not used. (b) (5 marks) Find the EVPI. (c) (2 marks) Does your answer in (b) indicate that consideration should be given to using the credit-rating organization? Justify.
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