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3325p11hs a decision making tools

Assign probabilities to the states of nature 4

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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...
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