3325p11hs a decision making tools

Assign probabilities to the states of nature 4

Info iconThis 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

This document was uploaded on 02/19/2014.

Ask a homework question - tutors are online