Decision Trees

Can someone explain this assignment? Preferably step by step, I feel lost, and I would like to best understand how to work this.

The question.

How should I set up these up in EXCEL?

I do not even know where to start.

• Develop a decision tree to maximize Ventron's expected monetary value (EMV).
  • This includes the revenue from this project, the side benefits (if applicable) from an improved extrusion process, and relevant costs.
  • You don't need to worry about the time value of money; that is, no discounting or net present values are required.
• What value of side benefits would make Ventron indifferent between the two alternatives?

The criteria.

The Ventron Engineering Company has just been awarded a $2 million development contract by the U.S. Army Aviation Systems Command to develop a blade spar for its Heavy Lift Helicopter program. The blade spar is a metal tube that runs the length of and provides strength to the helicopter blade. Due to the Heavy Lift Helicopter blade's unusual length and size, Ventron cannot produce a single-piece blade spar of the required dimensions using existing extrusion equipment and material.

The engineering department has prepared two alternatives for developing the blade spar: (1) sectioning or (2) an improved extrusion process. Ventron must decide which process to use. (Backing out of the contract at any point is not an option.) The risk report has been prepared by the engineering department. The information from this report is explained next.

The sectioning option involves joining several shorter lengths of extruded metal into a blade spar of sufficient size. This work will require extensive testing and rework over 12 months at $1.8 million. Although this process will produce a good blade spar, it merely represents an extension of existing technology.

To improve the extrusion process, on the other hand, it will be necessary to perform two steps: (1) improve the material used for $300,000, and (2) modify the extrusion press for $960,000. The first step will require six months of work; if this first step is successful, the second step will require another six months. If both steps are successful, the blade spar will be available at that time, a year from now. The engineers estimate that the probability of succeeding in steps 1 and 2 is 0.9 and 0.75, respectively. However, suppose either step is unsuccessful (which will be known only in six months for step 1 and a year for step 2). In that case, Ventron will have no alternative butto switch to the sectioning processand incur the sectioning cost on top of any expenses already incurred.

Development of the blade spar must be completed within 18 months to avoid holding up the rest of the contract. If necessary, the sectioning work can be accelerated in six months, but the cost of sectioning will increase from $1.8 million to $2.4 million. The director of engineering, Dr.Smith, wants to try developing an improved extrusion process. He reasons that this is not only cheaper (if successful) forthe current project, but its expected side benefits for future projects could be sizable. Although these side benefits are difficult to gauge, Dr.Smith's best guess is an additional $2 million. (These side benefits are obtained only if both steps of the modified extrusion process are completed successfully.)