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SBE10 CP21 - Chapter 21 Decision Analysis Chapter 21...

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Chapter 21 Decision Analysis Chapter 21 Decision Analysis Case Problem: Lawsuit Defense Strategy 1. Decision Tree To find the optimal decision strategy, we must fold the tree back computing expected values at the chance nodes and choosing the least cost alternative at the decision nodes. Shown below are the values computed at each node. CP - 74 4 2 1 Allied Accepts John's Offer of $750,000 Allied Counteroffers with $400,000 0.3 $750 John Accepts Allied's Counteroffer 3 $400 John Rejects Allied's Counteroffer Allied Loses Damages of $1,500,000 Allied Loses Damages of $750,000 Allied Wins No Damages 0.10 0.4 0.5 0.2 Allied Accepts John's Counteroffer 0.5 John Counteroffers with $600,000 5 Allied Rejects John's Counteroffer 0.3 Allied Loses Damages of $1,500,000 Allied Loses Damages of $750,000 Allied Wins No Damages 0.5 0.20 $1500 $750 $0 $600 $1500 $750 $0
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Chapter 21 Decision Analysis Node Value 1 670 2 670 3 825 4 600 5 825 Shown below is the decision tree with all nonoptimal branches eliminated. 2. Allied should not accept John's offer to settle for $750,000. The strategy associated with a counteroffer of $400,000 has an expected value of $670,000.
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