This document presents an example decision problem to demonstrate decision tree analysis. It describes three potential decisions - expand, maintain status quo, or sell now - under two possible future states, good or poor foreign competitive conditions. It then outlines the steps to analyze the problem: 1) determine the best decision without probabilities using various criteria, 2) determine the best decision with probabilities using expected value and opportunity loss, 3) compute the expected value of perfect information, and 4) develop a decision tree showing expected values at each node.

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
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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.
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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
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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
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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
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8. Decision Analysis
Example Problem
Develop a decision tree.
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9. THANK YOU…