Decision Trees and Payoff Tables

Directions: Complete the document, make sure to address all written requirements on this document, and create decision tree and payoff tables on an Excel workbook. You are required to submit both the document and Excel file in the digital classroom.

$1.$ The expected monetary value, or EMV, for any decision is a weighted average of the possible payoffs for this decision, weighted by the probabilities of the outcomes. Use the data in "Decision Tree and Payoff Tables" file.

View the Decision Making Under Risk video.

Decision $1$: Payoff$/$Cost per alternative of $$50,000,$ $$10,000-$$$5,000$ with probabilities respectively of $0\mathrm{.}1,0\mathrm{.}2,0\mathrm{.}7.$

Decision $2$: Payoff$/$Cost per alternative of $$5,000,-$$$1,000$ with probabilities respectively of $0\mathrm{.}6$ and $0\mathrm{.}4.$

Decision $3$: A fixed Payoff$/$Cost of $$3,000.$

a$.$ Draw a decision tree.

b$.$ Create a decision payoff table and calculate the EMV.

c$.$ Make decision recommendation. What are the risks?

$2.$ Objective: To use the EMV criterion to help Acme decide whether to go ahead with the product. Acme$$s cost accountants estimate the monetary inputs: the fixed costs $($$$6,000)$ and the unit margin $($$$18).$ The uncertain sales volume is really a continuous variable but, as in many decision problems, Acme has replaced the continuum by three representative possibilities: great $(45\%)600,000$ units, fair $(35\%)300,000$ units, and awful $(20\%)90,000$ units. Use the data in "Decision Tree and Payoff Tables" file. View the Decision Analysis $3$: Decision Trees video.

a$.$ Draw a decision tree.

b$.$ Create a decision payoff table and calculate the EMV.

c$.$ Make decision recommendation. What are the risks?