Decision Tree Analysis #$2$

Based on the decision tree given below, deduce which choice is better and its expected

monetary value.

Solution

To solve this question, you will calculate the EMV of both choices, find which choice is

more economically beneficial to the project, and then make a decision based on these

findings.

EMV of choice A $=10,000+0\mathrm{.}6*30,000-0\mathrm{.}4*50,000$

$=10,000+18,000-20,000$

$=8,000$ USD

EMV of choice B $=5,000+0\mathrm{.}8*40,000-0\mathrm{.}2*35,000$

$=5,000+3,200-7,000$

$=1,200$ USD

Both choices are representing opportunities, therefore you will go with the choice

which gives you the highest opportunity.

In the given question, choice A is giving you an opportunity of $8,000$ USD which is

the highest, so you will go with choice A$.$

$***$

Practice Question:

Based on the decision tree given below, deduce which choice is better and its expected