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Assignment 5 Decision Tree

The document contains an assignment to verify the profit projections on a decision tree for a project by Dante. It shows the calculations to get profits of $2,650,000 and $650,000 at the end branches. The optimal strategy for Dante is to take the expected value at each node, which is $2,350,000. The market research cost would need to decrease by at least $130,000 for Dante to change its decision. A risk profile for Dante's strategies is provided showing payoffs and probabilities.

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Felicity Lumapas
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87 views

Assignment 5 Decision Tree

The document contains an assignment to verify the profit projections on a decision tree for a project by Dante. It shows the calculations to get profits of $2,650,000 and $650,000 at the end branches. The optimal strategy for Dante is to take the expected value at each node, which is $2,350,000. The market research cost would need to decrease by at least $130,000 for Dante to change its decision. A risk profile for Dante's strategies is provided showing payoffs and probabilities.

Uploaded by

Felicity Lumapas
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Name: Sarah Gywneth T.

Sarmiento Management Science


Mr. Rene Argenal
Assignment # 5: Decision Tree
a. Verify Dante’s profit projections shown at the ending branches of the decision tree by calculating
the payoffs of $2,650,000 and $650,000 for the first two incomes.
For the 1st outcome: For the 2nd outcome:
Bid: 200,000 Bid: 200,000
Win Contract: 2,000,000 Win Contract: 2,000,000
Market Research: 150,000 Market Research: 150,000
High Demand: 5,000,000 High Demand: 3,000,000
=5,000,000- =3,000,000-
(200,000+2,000,000+150,000) (200,000+2,000,000+150,000)
=$2,650,000 =$650,000

b. What is the type of optimal decision strategy for Dante, and what is the expected profit for this
project?
Expected Value at nodes:
2: 0.8 (2000) + 0.2 (200) = 1,560
4: 0.6 (2350) + 0.4 (1150) = 1,870
8: 0.85 (2650) + 0.775 (650) = 2,350
9: 0.225 (2650) + 0.775 (650) = 1,100
10: 0.60 (2800) + 0.4 (800) = 2,000

c. What would the cost of the market research study have to be before Dante would change its
decision about the market research study?
Cost would have to decrease from at least $130,000

d. Develop a risk profile for Dante.


Strategies Payoff Probability
Bid, Lose Contract -200 0.20
Win Contract, build complex, 800 0.32
no market research (moderate
demand)
Win Contract, build complex, 2,800 0.48
no market research (high
demand)

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