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Decision Tree
       Example Problem

PRESENTED BY:- SATYABRATA PRADHAN
            BY:-
KRUPAJAL BUSINESS SCHOOL
REGD. NO.-11KB009
      NO.-11KB009
BATCH.NO:-2011-13
                      SATYABRATA PRADHAN
Decision Analysis
 Example Problem


                                      States of Nature
                         Good Foreign          Poor Foreign Competitive
     Decision
                      Competitive Conditions          Conditions
Expand                     $ 800,000                  $ 500,000
Maintain Status Quo         1,300,000                   -150,000
Sell now                       320,000                   320,000




                                                                  2
Decision Analysis
Example Problem

a. Determine the best decision without probabilities using
   maximax, maximin, and minimax regret
b. Determine best decision with probabilities assuming .70
   probability of good conditions, .30 of poor conditions. Use
   expected value and expected opportunity loss criteria.
c. Compute expected value of perfect information.
d. Develop a decision tree with expected value at the nodes.




                                                           3
Decision Analysis
Example Problem

Determine decisions without probabilities.
Maximax Decision: Maintain status quo
  Decisions      Maximum Payoffs
  Expand          $800,000
  Status quo     1,300,000 (maximum)
  Sell             320,000
Maximin Decision: Expand
  Decisions      Minimum Payoffs
  Expand         $500,000 (maximum)
  Status quo     -150,000
  Sell            320,000                    4
Decision Analysis
Example Problem

Minimax Regret Decision: Expand
  Decisions      Maximum Regrets
  Expand         $500,000 (minimum)
  Status quo        650,000
  Sell              980,000




                                      5
Decision Analysis
Example Problem

Determine Decisions with EV.
Expected value decision: Maintain status quo
   Expand         $800,000(.7) + 500,000(.3) = $710,000
   Status quo    $1,300,000(.7) - 150,000(.3) = $865,000
   Sell           $320,000(.7) + 320,000(.3) = $320,000




                                                           6
Decision Analysis
Example Problem Solution

Compute EVPI.
  EV given perfect information = 1,300,000(.7) + 500,000(.3)
  = $1,060,000
  EV without perfect information = $1,300,000(.7) -
  150,000(.3) = $865,000
  EVPI = $1.060,000 - 865,000 = $195,000




                                                        7
Decision Analysis
 Example Problem
Develop a decision tree.




                           8
THANK YOU…

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Decision tree example problem

  • 1. Decision Tree Example Problem PRESENTED BY:- SATYABRATA PRADHAN BY:- KRUPAJAL BUSINESS SCHOOL REGD. NO.-11KB009 NO.-11KB009 BATCH.NO:-2011-13 SATYABRATA PRADHAN
  • 2. Decision Analysis Example Problem States of Nature Good Foreign Poor Foreign Competitive Decision Competitive Conditions Conditions Expand $ 800,000 $ 500,000 Maintain Status Quo 1,300,000 -150,000 Sell now 320,000 320,000 2
  • 3. Decision Analysis Example Problem a. Determine the best decision without probabilities using maximax, maximin, and minimax regret b. Determine best decision with probabilities assuming .70 probability of good conditions, .30 of poor conditions. Use expected value and expected opportunity loss criteria. c. Compute expected value of perfect information. d. Develop a decision tree with expected value at the nodes. 3
  • 4. Decision Analysis Example Problem Determine decisions without probabilities. Maximax Decision: Maintain status quo Decisions Maximum Payoffs Expand $800,000 Status quo 1,300,000 (maximum) Sell 320,000 Maximin Decision: Expand Decisions Minimum Payoffs Expand $500,000 (maximum) Status quo -150,000 Sell 320,000 4
  • 5. Decision Analysis Example Problem Minimax Regret Decision: Expand Decisions Maximum Regrets Expand $500,000 (minimum) Status quo 650,000 Sell 980,000 5
  • 6. Decision Analysis Example Problem Determine Decisions with EV. Expected value decision: Maintain status quo Expand $800,000(.7) + 500,000(.3) = $710,000 Status quo $1,300,000(.7) - 150,000(.3) = $865,000 Sell $320,000(.7) + 320,000(.3) = $320,000 6
  • 7. Decision Analysis Example Problem Solution Compute EVPI. EV given perfect information = 1,300,000(.7) + 500,000(.3) = $1,060,000 EV without perfect information = $1,300,000(.7) - 150,000(.3) = $865,000 EVPI = $1.060,000 - 865,000 = $195,000 7
  • 8. Decision Analysis Example Problem Develop a decision tree. 8