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 + 0.6*30,000 - 0.4*50,000

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

= 8,000 USD

EMV of choice B = 5,000 + 0.8*40,000 - 0.2*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 monetary value.

60% Success 30,000 USD Choice A 10,000 USD 40% Failure 50,000 USD Decision % 80% Success 40,000 USD Choice B 5,000 USD 20% Failure 35,000 USD 60% Success 50,000 USD Choice A 15,000 USD 40% Failure 30,000 USD Decision 70% Success 40,000 USD Choice B 20.000 USD 30% Failure 20,000 USD 60% Success 30,000 USD Choice A 10,000 USD 40% Failure 50,000 USD Decision % 80% Success 40,000 USD Choice B 5,000 USD 20% Failure 35,000 USD 60% Success 50,000 USD Choice A 15,000 USD 40% Failure 30,000 USD Decision 70% Success 40,000 USD Choice B 20.000 USD 30% Failure 20,000 USD