Build a decision tree to help you decide if you want to purchase a new car or
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Question:
Build a decision tree to help you decide if you want to purchase a new car or a used car. The biggest concern or risk with purchasing a used car is the potential need for repairs and not knowing about any previous problems the car might have had. There is a 40% chance that a used car will need to be repaired within a one-year period; however, there is a 90% chance that the new car will not need any repairs during the same period. The cost for a used car is $7,500, and the cost for a new car is $15,000.
- Use the information in the table below to decide whether you should buy a used car versus a new car. Pick the decision with the lower investment required.
- Create a decision tree to show outcomes for each decision node using the SilverDecisions websiteLinks to an external site.
- Calculate the expected value of each outcome and show your calculations (Probability x Impact).
- Export your decision tree as a .png file and save it on your computer.
- Explain the best option based on the outcome and why.
Cost to buy a new car | $15,000 |
---|---|
Cost to buy a used car | $7,500 |
Probability of not having any repairs within one year | 90% |
Probability of repairing a used car within one year | 40% |
Cost of repairs for a new car | $5,000 |
Cost of repairs for a used car | $9,000 |
Related Book For
Quantitative Analysis for Management
ISBN: 978-0133507331
12th edition
Authors: Barry Render, Ralph M. Stair, Michael E. Hanna, Trevor S. Ha
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