How to Measure Anything Workbook: Finding the Value of Intangibles in Business

CHAPTER 7 Quantifying the Value of Information

1. A
2. B
3. C
4. C
5. E
6. True
7. B
8. A threshold is the exact value an uncertain variable on a continuum would have in order to break even on a decision. Below that value one choice is better and above that value another choice is better.

9. A

   Threshold = 6 × X = 3,000,000

   Solving for X, X = 500,000

   Relative threshold = (500,000 – 300,000)/(800,000 – 300,000) = 0.4

   EOLF (using EOLF chart) = 80

   EVPI = EOLF/1,000 × OL per unit × (BB – WB) = 240,000

   Or the spreadsheet for information value for normal distributions can be used to produce a value that should be close to the same.

10. E
11. A
12. D
13. True
14. E
15. C
16. A
17. B
18. E

19. 16%

    Using the Excel function we write: =NORMDIST(85,100,15,1)

20. $20,000

    EOL = .2 × $100,000 = $20,000

21. 0.33

    RT = (Threshold – WB)/(BB – WB)

    =(6000 – 4000)/(10000 – 4000)

22. Using either the EOLF chart or the information value for normal distributions, you should get an answer close to about $17,000 or so.
23. A situation where demand is uncertain but the losses from overstocking are less than the losses for understocking by the same amount.

24. 

25. Challenge:
    1. The discrete approximation starts with creating a table that divides the distribution into a large number of increments—perhaps hundreds or perhaps even one increment per unit of the product.
    2. For each increment, compute the probability of that increment given the 90% CI entered.
    3. For each increment, compute a loss of ...