This document discusses various approaches and tools for problem formulation and decision making in selection tasks. It outlines stages in the decision making process and criteria for project selection and evaluation. Tools covered include checklists, scoring models, benefit-cost analysis, cost-effectiveness analysis, risk analysis, and decision trees. Examples are provided for present worth analysis using net present value calculations, benefit-cost analysis using incremental costs and benefits, risk analysis, and evaluating decision trees. The document concludes with sample problems asking groups to decide how many buses to purchase for a new transportation system using the approaches discussed.

1. Problem Formulation and Decision
Making – Selection Tasks
Karl A. Smith
Purdue University/
University of Minnesota
ksmith@umn.edu
Preparing and Supporting Students to Work
in Teams in STEM Disciplines
Universiti Teknologi Malaysia
March 2009

2. Objective
Deterministic Stochastic
Multiple Ranking
AHP
SMART
MAUT
Single B/C
LP
Optimization
Decision
Tree (EV)
Simulation
Decision-Making Approaches

3. Outline
• Stages
• Criteria for Project Selection and Evaluation
• Tools
• Checklists and Scoring Models
– Benefit Cost Analysis
– Cost Effectiveness Analysis
– Risk Analysis
– Decision Trees

4. Tools
• Checklists and Scoring
• Benefit cost analysis
• Cost effectiveness
• Risk analysis
• Decision trees

5. Checklists and Scoring
• checklists
– good for limited data and resources
– example - sensors for side collision warning
systems
• scoring - adds subjective weights

6. Present Worth Analysis
• determine the minimum attractive rate of return (MARR)
• estimate the economic life of the project (i.e. N)
• estimate the cash inflow and outflow for each period.
• compute the net cash flow for each period
• compute the present value of each cash flow using the
MARR
• add up all the present value cash flows = NPV
• PW(i) = Σ An (P/F,i,n) for n=0 to N
• If NPV > 0 select project and if NPV <0, do not select
• If NPV = 0, you are indifferent.

7. Benefit cost analysis - continued
• Selection of projects using Benefit Cost ratios
requires consideration of incremental benefits and
costs.
• Procedure
– order project in terms of increasing investment
– check that each project is feasible (B/C >1)
– compare project I with I+1,
if B I+1-BI / C I+1-CI >1 then choose project I+1
– continue pairwise comparison until all alternatives are
exhausted.

8. Benefit cost analysis – Example
• An overpass is being planned. The
following parameters have been estimated:
– Initial cost = $1,800,000,
– Life (n) =30 years,
– MARR = 6%
– Salvage value = $100,000.

9. http://www.oim.dot.state.mn.us/EASS/

10. Project Selection Sample
Problems
• Two problems
• For each problem
• Decide how many busses to buy and give rationale
for your answer.
• One answer from each group.
• Every group member must be able to explain the
group's answer.

11. Problem 1
• A small manufacturer is going to develop a new bus system
for a community. As he only wants to run the transportation
company as a demonstration of his vehicles, he plans to
eventually sell the system to local investors.
• The manufacturer must decide whether to start with a small
fleet of 25 busses or a larger fleet of 50. The investment in
25 busses is approximately $6,200,000 and 50 busses
$11,500,000. The expected net present value of net revenues
is $6,305,000 for 25 busses and $11,676,000 for 50 busses.
• On the basis of benefit cost ratio, which option should the
manufacturer choose?
• Do you reach the same conclusion if you use net present
value analysis?

12. Risk analysis
• Failure can occur in many ways.
• Risk analysis attempts to quantify the
likelihood and the impacts of failure

13. Decision Trees
• Graphical representation of problems
involving sequential decisions.
• Notation
– decision node - square
– chance nodes -circle

14. Decision trees - continued
• Mechanics
– define initial decision node and then for each
decision and subsequent chance node and
identify all alternatives/outcomes.
– Assign probabilities to each outcome
– Evaluate the tree by finding expected values at
each decision node.

15. Decision trees - continued
• Mechanics
– define initial decision node and then for each
decision and subsequent chance node and
identify all alternatives/outcomes.
– Assign probabilities to each outcome
– Evaluate the tree by finding expected values at
each decision node.

16. Example - Decision tree
Construction site - construct high cofferdam or low cofferdam?
High cofferdam
$5,000
Low cofferdam
$4,000
Overtopping
p=0
No Overtopping
p=1
Overtopping
p
No Overtopping
1-p
5,000
5,000
14,000
4,000
Consequences

17. Project Selection Sample
Problems
• Problem 2 – with probabilities
• Decide how many busses to buy and give
rationale for your answer.
• One answer from each group.
• Every group member must be able to explain the
group's answer.

18. Session Summary
(Minute Paper)
Reflect on the session:
1. Most interesting, valuable, useful thing you
learned.
2. Question/Topic/Issue you would like to have
addressed.
3. Comments, suggestions, etc
4. Pace: Too slow 1 . . . . 5 Too fast
5. Relevance: Little 1 . . . 5 Lots
6. Instructional Format: Ugh 1 . . . 5 Ah