{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

3325p11hs a decision making tools

Assign probabilities to the states of nature 4

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: e 3. Assign probabilities to the states of nature 4. Estimate payoffs for each possible combination of decision alternatives and states of nature 5. Solve the problem by working backward through the tree computing the EMV for each state-of-nature node A – 25 Decision Tree Example EMV for node 1 = $48,000 = (.6)($200,000) + (.4)(–$180,000) Payoffs Favorable market (.6) ns Co c t ru Do t ge l ar t l an p Unfavorable market (.4) Favorable market (.6) Construct small plant no th in g 1 2 EMV for node 2 = $52,000 Unfavorable market (.4) $200,000 –$180,000 $100,000 –$20,000 = (.6)($100,000) + (.4)(–$20,000) $0 A – 26 Complex Decision Tree Example A – 27 Complex Example 1. Given favorable survey results EMV(2) = (.78)($190,000) + (.22)(-$190,000) = $106,400 EMV(3) = (.78)($90,000) + (.22)(-$30,000) = $63,600 The EMV for no plant = -$10,000 so, The if the survey results are favorable, build the large plant build A – 28 Complex Example...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern