Decision analysis tree<\/p>\n
Doug wants to determine the possible action for an asset worth $25000 that he bought long ago, an investor is offering Doug $275000 for the asset. If the real estate market goes through a boom, he will lose $1.5 million, if the market remains high, he will gain $4 million dollars. There are two options that Doug has to go for either to develop the site or sell the site;<\/p>\n
Options develop the sitesell the site<\/p>\n
Bad market conditions$1.5 million0<\/p>\n
Good market conditions$4 million$275000<\/p>\n
3400425774700025908002108200 $4 million <\/p>\n
3505200-127000847725381000015240039814425000<\/p>\n
0025000<\/p>\n
$1.5million<\/p>\n
3571875369570007715255797550079057525590500 $1.5 million<\/p>\n
354330027305000350520048387000 $1.5 million<\/p>\n
$0<\/p>\n
Therefore the overall decision is to develop the site, since there is a higher return from developing the site than disposing it to the buyer.<\/p>\n
Problem 2:<\/p>\n
Cutler-Hammer was offered an option (at a cost of $50,000) giving it the chance to obtain a license to produce and sell a new flight safety system. The company estimated that if it purchased the option, there was a 0.30 probability that it would not obtain the license and a 0.70 probability that it would obtain the license. If it obtained the license, it estimated there was a 0.85 probability that it would not obtain a defense contract, in which case it would lose $700,000. There was a 0.15 probability it would obtain the contract, in which case it would gain $5.25 million.<\/p>\n
If Cutler-Hammer wants to maximize its expected return, use a decision tree to show whether or not the company should purchase the option. What is the expected payoff?<\/p>\n
Suppose the company after purchasing the option, can sublicense the system. Suppose there was a 95% chance of zero profit and a 5% chance of a $1,000,000 profit. Would this new alternative change your decision above?<\/p>\n
Cost = $50000, C<\/p>\n
Probability not to obtain the license = 0.3, P(N)<\/p>\n
Probability to obtain the license =0.7, P(O)<\/p>\n
If the license is obtained;<\/p>\n
Probability not to obtain a defense contract = 0.85, P(D)<\/p>\n
Lose = $700000<\/p>\n
Probability to obtain a defense contract = 0.15, P(NO)<\/p>\n
5334000200660P(D)<\/p>\n
00P(D)<\/p>\n
Gains = $5.25 million<\/p>\n
28384506604000Decision tree;<\/p>\n
2295525253365P(0)<\/p>\n
00P(0)<\/p>\n
3009900119380054292511938000<\/p>\n
5410200327660P(NO)<\/p>\n
0P(NO)<\/p>\n
26574752145665P(N)<\/p>\n
00P(N)<\/p>\n
54292510312400028575574040C<\/p>\n
00C<\/p>\n
expected pay-off = P(O) P(D)<\/p>\n
=0.7(700000)<\/p>\n
=$49000<\/p>\n
Expected pay-off =P(O) P(NO) <\/p>\n
=0.7(5.25) <\/p>\n
=$3.675 million <\/p>\n
No, the decision couldn\u2019t have changed my option since there is higher returns in the first option than the later, hence, I would opt going with the probability that it would be obtained without a defense contract. <\/p>\n","protected":false},"excerpt":{"rendered":"
Decision analysis tree Doug wants to determine the possible action for an asset worth $25000 that he bought long ago,<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-44240","post","type-post","status-publish","format-standard","hentry"],"yoast_head":"\n