1. The document outlines two homework problems involving quantitative decision analysis to model project risk and determine the expected monetary value of projects.
2. For the first problem, the document provides a sample decision tree analysis for determining whether to buy an umbrella based on the probability of rain. It shows how to calculate the expected monetary value and choose the option with the highest payoff.
3. For the second problem, the document discusses performing a sensitivity analysis on the decision tree to determine how robust the decision is to changes in probability assumptions. It emphasizes the importance of this analysis for project comparison and risk assessment.
How to Send Pro Forma Invoice to Your Customers in Odoo 17
Andrew J. LeeTIM 105Subhas DesaDue 102215HW#4Time-Pha.docx
1. Andrew J. Lee
TIM 105
Subhas Desa
Due: 10/22/15
HW#4
Time-Phase Plan:
Saturday
Sunday
Monday
Tuesday
Wednesday
Task:
Research and Development Problem
Finish Research and Development Problem, start Drug X
Problem
Finish Drug X Problem
Revisions
Revisions
Research & Development Problem:
Problem:
How can we determine whether Bill should fund a research team
to cure Lyme’s disease?
Real problems that need to be solved:
· Should Bill fund a research team?
· If Bill funds a research team, should they produce the drugs
themselves?
· How/where did Jackson Pharmaceuticals obtain their
probability values?
Plan:
Information available to solve the problem:
· Lectures/Notes
· Textbook
2. · Internet
Analyses and steps that must be performed:
- Perform a decision analysis to model the dilemma
- Draw decision trees and diagrams
- Determine the pay offs/EMVs of each possible decision and
draw conclusions through comparison
- Speculate how/where the probability values are determined
Execute:
Decision Analysis:
Basic Building blocks:
Influence Diagram:
Decision Tree:
Payoff or Expected Monetary Value associated with each choice
(through folding back Decision Tree):
Yes to funding research, yes to producing themselves: $9.2
Million
Yes to funding research, no to producing themselves: $6 Million
No to funding research: $0
Conclusion:
Bill Mackenzie should definitely make the decision to fund a
research team to cute Lyme’s disease, as well as producing the
product themselves if they successfully find the cure.
Reviewing the decision analysis payoffs, funding the research
and producing the product themselves has an expected monetary
value (EMV) of $9.2 million. Assuming both decisions run
successfully, this yields a revenue of $60 million, recovering
the $10 cost and yielding a profit of $50 million. Even funding
the research and selling the license for producing the product to
a chemical lab has an EMV of $6 million, and would yield a
profit of $30 million accounting for the $10 million cost.
3. Compared to the payoff of $0 in not funding the research,
executing a successful R&D program would greater benefit the
company. Shown in the decision analysis, the rewards of
success greatly outweigh the consequences of the program if it
were to fail.
Jackson Pharmaceuticals likely got their probability values
through analyzing their own company’s past experience with
R&D, as well as other data available on historical performance
from similar companies in the industry. Compiling information
on other companies who have tried curing a disease, or fixing a
problem and their success rates can be used as a base for
Jackson Pharmaceuticals to derive their own probability
numbers, while taking into consideration their past
performances and capabilities in R&D and production
quality/consistency.
Drug X Product Development Problem:
Problem:
Should Pharma C, Inc. pursue the commercial development of
compound X?
Real problems that need to be solved:
· Does the potential payoff outweigh the potential cost?
· What value should you place on the project when comparing it
to competing projects?
Plan:
Information available to solve the problem:
· Lectures/Notes
· Textbook
· Internet
Analyses and steps that must be performed:
- Perform a decision analysis to model the dilemma
- Draw decision trees and diagrams
- Determine the pay offs/EMVs of each possible decision and
draw conclusions through comparison
- Perform a sensitivity analysis on the results
- Identify the primary method of valuing projects such as this
4. one against other competing projects
Execute:
Decision Analysis:
Basic Building blocks:
Influence Diagram:
Decision Tree:
Payoff or Expected Monetary Value associated with each choice
(through folding back Decision Tree):
Yes to investing in R&D, and testing for approval: $51.25
Million
No to investing in R&D: $0
Sensitivity Analysis:
· Given a 20% perturbation in the probability of Successful
Testing (0.60):
· P1 = 0.72
· Payoff of approving testing: $500(0.72)+(-$50)(0.28) = $346
Million
· Payoff of pursuing project: $346(0.25)+(-$25)(0.75) = 67.75
Million
· EMV increases by 16.5 Million
· P1 = 0.48
· Payoff of approving testing: $500(0.48)+(-$50)(0.52) = $214
Million
· Payoff of pursuing project: $214(0.25)+(-$25)(0.75) = 34.75
Million
· EMV decreases by 16.5 Million
· Given a 20% perturbation in the probability of Compound
Effectiveness (0.25):
· P1 = 0.30
· Payoff of pursuing project: $280(0.30)+(-$25)(0.70) = 66.5
Million
5. · EMV increases by 15.25 Million
· P1 = 0.20
· Payoff of pursuing project: $280(0.20)+(-$25)(0.80) = 36
Million
· EMV decreases by 15.25 Million
· Given a 20% perturbation in the probability of both Successful
Testing (.60) and Compound Effectiveness (0.25):
· P1ST = 0.72, P1CE = 0.30
· Payoff of approving testing: $500(0.72)+(-$50)(0.28) = $346
Million
· Payoff of pursuing project: $346(0.30)+(-$25)(0.70) = 86.3
Million
· EMV increases by 35.05 Million
· P1ST = 0.48, P1CE = 0.20
· Payoff of approving testing: $500(0.48)+(-$50)(0.52) = $214
Million
· Payoff of pursuing project: $214(0.20)+(-$25)(0.80) = 22.8
Million
· EMV decreases by 28.45 Million
Conclusion:
Pharma C, Inc. should pursue the commercial development of
compound X. It is evident in the Decision Analysis process that
product development of Drug X will bring a high potential
profit that outweighs its potential losses. The calculated
expected monetary value takes both measures into account, as
well as the probabilities of success and failure during the R&D
and Testing procedures and yields a high payoff of $51.25
million.
Ultimately, in pursuing the development of Drug X, Pharma C,
Inc. should continue to value the project against competing
projects through its calculated payoff, or EMV. While expected
profits can be useful in indicating which projects have the
highest benefit potential, EMV considers the prospects of
failure, the probabilities of different outcomes during
operations and execution stages, as well as the costs of failure
that may make certain projects less desirable compared to other
6. competing projects. EMV can also be computed for various
levels of decisions, which is useful in identifying where aspects
of one project’s execution may bring more value than stages of
a competing project.
Through valuing the project based on EMV, Pharma C, Inc. can
also perform sensitivity analyses to allow the company to better
understand the relationship between how probabilities of
success or failure with each decision impact the EMV of the
overall project. By being aware of which decisions are robust,
and which ones are not, Pharma C can better evaluate and
compare risk between projects, and perhaps look into
researching determinants of those probabilities and how to
improve success rates.
We see in the sensitivity analysis of Drug X development that
the decision to pursue the project does not change despite a 20%
perturbation in the probability of Successful Testing or
Compound Effectiveness. The decision also remains the same
for a 20% perturbation in both probabilities. The EMV remains
very high despite decreases or increases in the input
probabilities, making the decision to pursue less risky and more
robust in the event that estimations were inaccurate. In addition,
the sensitivity analysis indicates that perturbations in the
estimated probability of Successful Testing impact the EMV
more-so than perturbations in the probability of Compound
Effectiveness. We can conclude that the testing stage and its
success ultimately play more of a role in generating the
expected monetary value for the project than the investment in
R&D.
Plan: Monday: read lecture notes, handout. Analyzing the
problem.
Tuesday: Set up meeting time with group mates for problem 1
and 2.
7. Wednesday: assign tasks to each members and start problem 1
Tuesday: finish problem2 and accomplish group tasks
Friday: Finish project
Prob 1
1.Define existing problem:
clearly define the problem you are attempting to solve. Identify
the real problems that need to
be solved.
Problem1: What should Bill McKenzie do?
Problem2: How do you think the probability, cost, and revenue
information used in this
analysis were obtained?
2. Plan the treatment of the problem, i.e., the way in which you
going to structure your analysis
of the given information in order to solve the problem. Define
the process (logical set of steps)
for solving the problem by carefully addressing the following
questions:
What information is available for solving the problem?
8. Lecture notes
What assumptions need to be made to make the solution process
manageable?
Assuming that the only source for information needed has
already been provided
3. Execute the plan:
Apply the 6-steps decision analysis process
4. Check your work
Is the work correct in every detail?
I think so.
Are my assumptions reasonable?
They are reasonable. All assuming that the information provided
9. for the assignment is correct
In terms of the things I know, do the results make sense?
Yes the results make sense and follow accurately with what I
know today.
5. Learn and Generalize
What have I found out? What does the result mean?
How may the result be affected by my assumptions?
Are the results good enough to act on, or must I refine the
solution?
I believe that my results are enough to put into action.
Prob 2
1.Define existing problem:
clearly define the problem you are attempting to solve. Identify
the real problems that need to
be solved.
Problem1: Should you pursue the commercial development of
Compound X?
Problem2: If you do pursue development, what value should
You place on the project when
10. comparing it to competing projects?
2. Plan the treatment of the problem, i.e., the way in which you
going to structure your analysis
of the given information in order to solve the problem. Define
the process (logical set of steps)
for solving the problem by carefully addressing the following
questions:
What information is available for solving the problem?
Lecture notes
What assumptions need to be made to make the solution process
manageable?
Assuming that the only source for information needed has
already been provided
3. Execute the plan:
11. 4. Check your work
Is the work correct in every detail?
I think so.
Are my assumptions reasonable?
They are reasonable. All assuming that the information provided
for the assignment is correct
In terms of the things I know, do the results make sense?
Yes the results make sense and follow accurately with what I
know today.
5. Learn and Generalize
What have I found out? What does the result mean?
How may the result be affected by my assumptions?
Are the results good enough to act on, or must I refine the
solution?
I believe that my results are enough to put into action.
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12. Quantitative Decision Analysis (DA) to manage risk
1.
Problem: how can DA Bbe used to model project risk by
determining the project payoff($)
Terminology (notation):
Basic Building Blocks for DA:
13. How do we calculate the payoff (emv) for a project
14. Approach & Execution
[use HW #3, problem #2: “umbrella problem”:
should I buy an umbrella or not? ]
Step 1:
15. choice
1
2
Decision Decision
choice
Raw Block
1
2 probability
uncertain uncertain
event event 52awbability
X
Raw Block Mobility
3
obtective
Maximize payoff or
Expected neonetary chuelemu
plan orprocess forsowingall DecishnAnalysisproblems
yesx
16. Rain
BUY an 21
NOumbrella 5 No
Gh
List all the building blocks relevant to the particular problem of
interest, with all the associated branches
Step 2:
17. Important remarks: when creating the ID sue only the
“raw” building blocks
Step 3: Covert the ID (from step 2) into a Decision Tree (DT)
by including all the appropriate branches for
the “decision” & “uncertain event” clocks from step .
18. Include all relevant cost & probability information in the
DT.
For the umbrella problem, the nominal probability, p1 =
0.40
Step 4: Fold back the DT to obtain (calculate) the payoff
associated with each of the choices in the decision
block(s).
20. Time 0 Tine 1 Time 2
yes
Rain
25
25Buy.an
No 4kgumbrella
pains 75
go
ii.im
I 1
I
payoff yes I 2511 t 25114
cost 1512510.411 1525 10.6 5125
(Do NOT skip this step) Create an Influence diagram (ID),
which is a
high-level chronological view (from left to right) of the relation
between
the blocks in step 1
IIIIII I to
75
NOT 0
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22. ofRain
Step 5: Choose the option (decision) which maximizes payoff.
In this case, maximizing payoff is equivalent to
minimizing cost
for p1 = 0.40 (nominal)
Cost (“yes”) = $25
Cost (“no”) = $75 p1 =$30
=> Decision “yes” -> buy an umbrella
23. Step 6: perform a sensitivity analysis to determine the
“robustness” of your decision w.r.t. changes in the
nominal value of the input parameters
Pnom. Nominal probability => use the DT
=> decision 1
in the nominal probability, & then use in the DT to
determine the corresponding decisions with these
new probabilities.
Example: for a +- 10% change in the nominal
probabilities
24. Robust Decision is one that does not change when the nominal
probability is either increased or decreased
by a certain percent (say 10%)
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26. 2. HW #3 & project phase 1
Sign - up for a project review meeting next week
phase 1 deliverables
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36. Agenda
City lecture the I/M competitive analysis (Done see above)
1.
Functional Maps (HW#2, prob. 1)
2.
HW #2, prob #2 (Intel)
3.
Project proposal meetings: Tuesday, Wednesday
4.
2. Functional Maps (HW #2, prob #1)
Refer to the disk-drive industry handout
Context:
37. Example: Fig 1.7
- Functional map of hard-disk capacity (MB)
- shows the evolution of a key performance parameter:
capacity (MB)
- shows how technology “supply” (capacity, MB) is
always significantly greater than market “demand”.
- this functional map would be useful for the
“engineering” function in the company: setting
performance targets; marketing decisions about
migrating to new geometries (14 inch -> 8 inch -> ...)
Tt Industry
Computer Industry
diskdrive microprocessor
Industry Indisey
Rwb411 lamb 4
cse171A .3.pdf
38. Definitions
Function refers to organizational functions: Engineering,
manufacturing, marketing, ...
1.
Each of these functions has important dimensions
2.
for example, the key dimensions of engineering are product
performance, critical skills...
3. Structural Analysis of industry (aka competitive strategy
analysis
39. Competitive strategy comes from “the positioning school”
(porter = 1980)
Terminology:
Industry: the set of players for some technology or product type
e.g. disk-drive industry, consumer
electronic industry, health-care industry...
Players (in) the industry: competitions, new entrants,
substitutes, suppliers.
Market: Buyers (or customers) of the product/service
Forces: micro-economic forces that exist among the players
Company (or firm or enterprise ) : companies are embedded in
the industry of interest.
Porter asked the following questions:
Def. of the problem
40. 1.
Example: The personal computer industry = 1980s
2. Plan or process: 5 step process
Creat a structural map of the industry/market (I/M) landscape in
which the company of 1.
interest is embedded.
Perform a five (or six) forces analysis of the I/M landscape
(structural analysis)
2.
Determine the attractiveness (as measured by the profit
potential, in particular, the return on 3.
invested capital [ROIC]) of the industry
Determine or decide on the company’s position or competitive
strategy
4.
Tech Company
Functions Engr Mant Marketing
Demensions tertiaryp
41. Cole Inahodtrevenue
fun.tn
features
Example Companie Function Dementh
Intel Engineering Performance
Function
map
chip Density
how attractive is an industry from the viewpoint of the •
player?
What position or competitive strategy should a •
competitor (in the industry) adopt?
What are the relationships between the players in the I/M
landscape?
5.
3. Execution of the plan:
e.g. PC industry in the 1980s
execution of Step 1,2 in the plan
42.
43. Step 2: perform a five (six) forces analysis of the
industry/market structure
Process:
-for each force, there are a set of determinants that
affect the intensity (or strength) of the the force
Example : Force F1 (Rivalry between the competitors) is
affected by the concentration (# of
competitors), size ($),...
44. - A list of the determinants for each of the five
forces is given in table 1 of “LNCS”.
- for each force, determine the qualitative strength
(high, medium, low) of the force based on the
determinants in Table 1, column 2. Table 1, column
3, shows the qualitative strength for each of the
5 forces for the PC industry in the 1980s
Step 3: Determine the attractiveness of the industry as a whole:
Qualitative: H,M,L
Def: the attractiveness (i.e. profit potential measured by the
ROIC) of the industry (e.g., the PC industry) is
determined by the cumulative (or total) strength of the 5
forces.
if the cumulative (total) strength of the 5 forces is high,
then the industry is not attractive of (say) a new
entrant.
Example: from Table 1 which shows the qualitative strength of
each forces (column 3), the cumulative
strength of the PC industry in the 1980s. Is
45. “medium to high”
Competitors Inelek Industry
Newentrance IBM
Compay Hp
I
take
Supplierpower
f2 L
suppliers Competitive Buyers
Microprocessors consumersForces2112 enterprisesIntAMD 1
RivalrybetweenGmletHtm
operatingsystem 14 u
Foreszles 45Microsoft threatofNewenthnes
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Seagate y Hitler4Substitutes
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Thepower to er powerosmarutaelor penComputing GoApple
Influence Softwaremanufacture appAlpalm
Microsoft
46. Step 4: determine or decide on the company’s position or
competitive strategy to compete successfully in
the I/M landscape
Process:
47.
48. According to porter, for a company to be successful
in a particular industry it must adopt one (&
only one of the following three strategies:
- differentiated strategy ( describe if for
yourself)
- cost leadership
- focus
- stuck-in-the -middle
Comment: competitive strategy is dynamic
(evolutionary) -> companies change their CS
(competitive strategy) with time
49. -> the creation all of functional maps guides the
evolution of strategy.
a product low costuniqueproduceasprecedbyCustomer
make
wide differentiated case leadership
Target strategy D
market
Focus
yammer
segment
not relomerdoom
PC industry (of the 1980s) is (probably) not attractive to new
entrants & substitutes.
Create a 2 - dimensional grid
product dimension, which has 2 extremes
•
unique product as perceived by the customers, differentiated by
aspect such as ◦
quality (additional features), reliability, user - interface, ...
Lowest cost
◦
50. Market dimension (or target market for the product), which has
2 extremes:
•
A product for the entire market
◦
A product for a particular segment (focus)
◦
Step 5: Determine the relationships between the different set of
the layers in the I/M landscape.
Example:
The intel case study (HW #2, Prob #2)
what relationship did intel (the competitor in the micro
processor industry) have with its •
supplies?
Single sourcing
◦
51. ...
◦
What relationship does intel have with its buyers (i.e. computer
manufactures)
•
E.g. “intel inside”
◦
... ◦
cse171A .2.pdf
10/1
Agenda
1 HW 1 (due on Thursday)
2 Project: Preliminary Proposal (due on Oct 3)
3 Project teams
HW1
Preliminary Instructions
1. Develop a plaining habit
—Create a plan (when, how long…)
—Submit the plan
2. Develop a structured problem-solving habit
52. —Download the SPSP handout from Canvas
—Every time you solve a problem, “copy & paste” the handout
into your problem
solution
—Decide which sub-step(for each primary step) are relevant to
the solution of
your particular problem => Customize the SPSP for your
particular problem
HW1, Prob #1
Problem as given: “Improve the existing cell-phone”
=> vague, open-ended problem statement
Apply the SPSP to this problem
Step 1: Define the real problem(s)
(requires reflections, thinking, asking questions)
Establish sub-problems(SPs)
SP1: Establish customer needs that all (generic) cell-phones
should satisfy
SP2: Assess existing cell-phone products /services to determine
how well these customer
53. needs are satisfied
SP3: Identify(generate) ways (or solutions) to improve existing
cell-phones
with respect to a customer needs(from SP1) &
assessments(from SP2)
Step2: Create a Plan
(a) Assumptions
Who am I? perhaps, an engineer or a marketing analyst at a
cell-phone company,
like Apple, Samsung,..
Who is the solution for? for the new product development
team,… CTO, CEO
Which type(manufacturer) of cell-phone should you focus on?
Obvious (ex:the
one which you own)
(b) What information do I need
—how cell-phones work => functions & needs of the cell-
phones & how they are
realized
—Other (?)
Create a plan for solving each sub-problem(SP)
54. SP1: Establish needs …
—how cell-phone work
—Internet research
—List of customer-needs(functions, features)…
— Ҙ
SP2: Assess how well …
— your own experience
— Internet consumer research
—customer survey
SP3: Improve..
—research (internet)
—structured brainstorming
— …?
Step 3: Execute the plan
5~8 hours of work
How should I present my results?
Table?
55. example:
Step 4: Check your work
Reflect on your results, ask questions,…
Step 5: Learn & generalize
—about cell-phones & improving them
—yourself as a problem-solver
Needs Assessment
ease of use
performance
reliability
S. Desa, CSE 171A/270A
10/17/19
HW#4CSE171A/270A: MOT I: Homework 4: Decision Analysis
---------------------------------------------------------------------------
---------------------------------
Midterm: will be handed out on Thursday, 31 October 2019, in-
class; and will be due the following Tuesday, 05 November
2019.
---------------------------------------------------------------------------
---------------------------------
Reading: U&E, PDD, Fourth Edition, Chapter 3-5 (Pages 33-
96); and class handouts.
“Simple it’s not, I’m afraid you’ll find, for a mind-maker-upper
to make up his mind” – Dr. Seuss on Decision Making
56. ---------------------------------------------------------------------------
---------------------------------
Homework Problems (Due Thursday, 24 October, 2019):
1. Research & Development. Jackson Pharmaceuticals Inc. is
considering funding a research team to cure Lyme’s disease.
Bill Mackenzie, executive VP of research, must ultimately make
this decision. The research program has a total price tag of
$10M (million), and there is no guarantee that it will be
successful. In fact, Bill estimates only a 40% chance that they
will find a cure. If the research team finds a cure, Jackson
Pharmaceuticals must then decide whether they wish to produce
the drug themselves or sell the license to a chemical lab for
$40M revenue. If they produce the product themselves and
production goes smoothly, they forecast a revenue of $60M.
However, refitting one of their production facilities is not
without risk. There is a 30% chance of production troubles, in
which case they would earn only $20M revenue.
What should Bill McKenzie do? (Result: Expected Monetary
Value or payoff from a successful R&D project = $9.2 M)
How do you think the probability, cost, and revenue information
used in this analysis were obtained?
2. Should Pharma C, Inc. invest in product development of
Compound X? If a cure can be developed for Some Horrible
Disease (SHD), it would be beneficial to humankind and yield a
profit of $500M. Our initial research indicates a 25% chance
that a Compound X will be effective against SHD. However,
confirmation of efficacy will require an additional $25M
investment in R&D. Furthermore, even if Compound X is
proven effective, an additional $25M will be required for the
clinical trials required to get it approved for human use. It is
estimated that there is a 40% chance that these trials will reveal
serious side effects and approval will be denied.
As SHD’s project director you are concerned with 2 principal
issues. First, should you pursue the commercial development of
57. Compound X? Second, if you do pursue development, what
value should you place on the project when comparing it to
competing projects?
Perform a sensitivity analysis on your results.
3. (CSE 270A) Oil Drilling problem. Mr. Sam Houston of
Texas is about to exercise his option to drill for oil on a
promising parcel of land. Should he drill? If he hits a gusher
there is an estimated $1M of revenue to be gained. After careful
analysis of the problem, he came up with the following list of
alternatives and risks:
a. Sam paid $20,000 for the drilling option.
b. Sam could lower his risks if he hired a geologist to perform
seismic testing ($50,000). That would give him a better
indication of success and lower his risk of wasting drilling
costs.
c. Should he take a risk and incur $200,000 in drilling costs
without a seismic evaluation to guide him?
d. Sam consulted with the oil experts. They believe Sam’s
parcel has a 60% chance of having oil without the benefit of any
test.
e. It has been the experts’ experience that if seismic tests are
positive for the oil, there is a 90% chance that there is “some”
oil. And conversely, there is a 10% chance of failure.
f. If the seismic tests are negative, Sam could still drill but with
a 10% chance of success and a 90% chance of failure.
g. Sam could decide not to drill at all.
What should Sam do?
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