Decision Tree Example - .05 Low Medium .15 Low Low .80 Buy...

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You have the option of buying a golf cart to rent out at your golf course. If you purchase the taxi, there are three possible use cases: High Medium and Low. Given the anticipated cash flow and probabilities associated with each use case, what is the expected monetary value of purchasing this golf cart? Use Case Probability Revenue High 0.3 $1000 Medium 0.4 $500 Low 0.3 $-750 Buy Don't Buy Now Let's say you have the option to Pay for a survey that will give you a better estimate of demand for this service. The survey is not perfect, but will improve your outlook. Based on the following information about the survey, how much should you pay for the survey (To simplify, don't consider Bayesian Probabilities) Survey Predicts Actual state that occurs Probability High High 0.8 High Medium 0.15 High Low 0.05 Medium High .10 Medium Medium .80 Medium Low .10 Low High
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Unformatted text preview: .05 Low Medium .15 Low Low .80 Buy Don't Buy Event Tree Example: Friday, October 01, 2010 7:20 PM Unfiled Notes Page 1 When you have a choice between options, use a decision node (square) If there are outcomes that are uncertain, use a chance node. Start by building up the decision tree from left to right. When you reach a decision node, stop and calculate the EMV of all possible uncertain Once the decision tree has been built up, work from right to left, at each branch. Tips for Working through Decision Trees: Unfiled Notes Page 2 outcomes that lead to that decision node. At each decision node, assume the option with the highest EMV, and repeat, working back through the chance nodes and decision nodes until all branches have been completed. Unfiled Notes Page 3...
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Decision Tree Example - .05 Low Medium .15 Low Low .80 Buy...

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