Module Five Problem: In this problem, you will work through a full decision analysis. The decision includes both a positive branch for determining the business opportunity as well as a negative type branch which evaluates the use of an analyst that may provide unusable results at a cost. It is a great, simple problem to exercise your decision tree skills. Leverage the information from the videos viewed at the beginning of this document as well as your treeplan skills from last module.

Decision Analysis Problem: You are a potential business owner in the hoomaflopper industry. You have hired Dustin R. Mopps as your industry insider to help you decide which businesses to focus on potentially buying. He has collected useful data from multiple sources for you. The problem with Mr. Mopps is that he is a terrible decision analyst. So, it is up to you to figure out what to do.

Dustin found a business for you to look into for a possible purchase: property ID number 51 in your data set, valued at $188,000. If this property is indeed viable, it is estimated to earn you $500,000 in the first year of business. However, you will have to pay $60,000 to perform a systems audit and refurbish it right after you buy it. Your back-of-the-envelope estimate is that there is X chance that you could realize the $500,000. You will need to spend a little time to figure out X for your model.

Alternatively, you could hire Dustin to first do some real estate legwork for you, since real estate data is his specialty. He will ask for $16,000 to do further market research for you. From sneakily talking to his other clients, you estimate the probability as 60% that Dustins market research will be favorable, if the business is going to be viable. The probability of an unfavorable report from Dustin is 70% if the business will not be viable. In other words, you trust him, but not that much. He might be able to give you an edge. You need to know if it is worth paying him the $16,000 or not. Keep all of these values in mind for your conditional probability calculations.

Overall Question: What is your optimal strategy for deciding whether to purchase business number 51, based on expected value?

Helpful Hints in this Analysis:

Some thoughts to consider: Do not pay Dustin but just buy it? Walk away from it? Pay Dustin for more research or not? Then buy it on his advice? or dont?

This problem has classic decision under uncertainty conditions. A good decision analysis should help you answer these questions.

Consider first that you need to know what X is. Without it, you will not be able to proceed.

Analysis Approach: Following Wus method, and using the information presented in the problem description, perform the following steps:

1.You will need to download the following files from Blackboard to the Documents folder

a.From the Module Five Folder: Mopps Data Set Data Dictionary (includes information about the variables)

b.From DAT 520 Data Files Folder:

i.Mopps with Commas: this is the data set for the problem

ii.ProblemSet 5 Tree: this is the tree we will fill in values to in the exercise

2.Open Mopps with Commas in Excel and answer the following questions:

a.Question 1: What is the probability that a property worth at least $150,000 in year 1 ends up worth $200,000 or more in year 5? (Hint: Think about numerator and denominator to answer this question. How many properties are there overall? How many properties start out at $150,000+ and then end up at $200,000+ in year 5?)

b.Question 2: What is the probability that a property worth at least $150,000 in year 1 ends up worth more than $279,000 in year 5? (Hint: Think about numerator and denominator to answer this question. How many properties are there overall? How many properties start out at $150,000+ and then end up at $279,000+ in year 5?)

3.Open the ProblemSet 5 Tree file in Excel

a.Use the answer for Question 2 above to fill in the X%

b.Using the information provided with the problem, fill in all of the blue cells on the Excel worksheet.

i.There are 39 blue cells for 2 points each, totaling 78 points

c.Calculate the sheet (hit F9)

4.Provide the answers to Question 1 and Question 2 above into Word

5.Further provide the answers to the questions that follow:

a.Describe and interpret what is going on in this tree in about 250 words.

b.Include a discussion on what the optimal strategy is and why is it the optimal strategy?

c.Include a statement of what the expected value is? What does expected value mean here?

d.Change the values in cells B:20 to B:26.These contain the costs and payouts.Change these one at a time and calculate sheet. Discuss what threshold values flip the decision tree to recommending a different strategy?

6.Highlight your final tree in Excel, Copy it, and Paste Image at the end of your word document.

7.Save your Word Document and submit via blackboard.Notify your instructor of any issues you encounter.