The expected value of perfect information is obtained from
EVPI ¼ EPPI À max :EMV
¼ Rs: 3, 185 À 2, 175
ð
Þ ¼ Rs:1010
16.6.4 EMV for Items That Have a Salvage Value
In the discussion so far it has been assumed that the product being stocked was
completely worthless if not sold on the ‘selling’ day. This assumption, that the
product has no salvage value, is not always realistic. If the product does have a
salvage value, then it must be considered in calculating the conditional profits for
each stock action.
Example 16.6
An ice-cream retailer buys ice-cream at a cost of Rs. 50 per cup and sells it for
Rs. 80 per cup; any remaining unsold at the end of the day can be disposed of at a
salvage price of Rs. 20 per cup. Past sales have ranged between 15 and 18 cups per
day; there is no reason to believe that sales volume will take on any other magnitude
Table 16.17a Dairy statistics Quantity required (kg)
No. of days demand occurred
15
6
20
14
25
20
30
80
35
40
40
30
50
10
Table 16.17b Conditional profit table
Possible
demand
D (kg) (Event)
Probability
Possible stock action (alternative) S (kg)
15
20
25
30
35
40
50
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
15
0.03
1500 À500 À2500 À4500 À6500 À8500 À12,500
20
0.07
1500 2000
0 À2000 À4000 À6000 À10,000
25
0.10
1500 2000
2500 500
À1500 À3500 À7500
30
0.40
1500 2000
2500 3000
1000
À1000 À5000
35
0.20
1500 2000
2500 3000
3500
1500
À2500
40
0.15
1500 2000
2500 3000
3500
4000
0
50
0.05
1500 2000
2500 3000
3500
4000
5000
460
16 Decision Taking with Infrastructure