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Decision tree example problem

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  • 1. Decision Tree Example ProblemPRESENTED BY:- SATYABRATA PRADHAN BY:-KRUPAJAL BUSINESS SCHOOLREGD. NO.-11KB009 NO.-11KB009BATCH.NO:-2011-13 SATYABRATA PRADHAN
  • 2. Decision Analysis Example Problem States of Nature Good Foreign Poor Foreign Competitive Decision Competitive Conditions ConditionsExpand $ 800,000 $ 500,000Maintain Status Quo 1,300,000 -150,000Sell now 320,000 320,000 2
  • 3. Decision AnalysisExample Problema. Determine the best decision without probabilities using maximax, maximin, and minimax regretb. 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 AnalysisExample ProblemDetermine decisions without probabilities.Maximax Decision: Maintain status quo Decisions Maximum Payoffs Expand $800,000 Status quo 1,300,000 (maximum) Sell 320,000Maximin Decision: Expand Decisions Minimum Payoffs Expand $500,000 (maximum) Status quo -150,000 Sell 320,000 4
  • 5. Decision AnalysisExample ProblemMinimax Regret Decision: Expand Decisions Maximum Regrets Expand $500,000 (minimum) Status quo 650,000 Sell 980,000 5
  • 6. Decision AnalysisExample ProblemDetermine 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 AnalysisExample Problem SolutionCompute 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 ProblemDevelop a decision tree. 8
  • 9. THANK YOU…