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Decision Tree Example: Bruce Powell PMP Intel Corp

The document describes using a decision tree to analyze whether to build a new plant or upgrade an existing plant given uncertainty around future demand being strong or weak. The tree calculates the expected monetary value at each decision node and identifies the highest value option. It determines that upgrading the existing plant has a higher net value of $49 compared to building a new plant with a net value of $41.5, so the optimal decision is to upgrade the existing plant.

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0% found this document useful (0 votes)
49 views8 pages

Decision Tree Example: Bruce Powell PMP Intel Corp

The document describes using a decision tree to analyze whether to build a new plant or upgrade an existing plant given uncertainty around future demand being strong or weak. The tree calculates the expected monetary value at each decision node and identifies the highest value option. It determines that upgrading the existing plant has a higher net value of $49 compared to building a new plant with a net value of $41.5, so the optimal decision is to upgrade the existing plant.

Uploaded by

geng3
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Decision Tree Example

Bruce Powell PMP Intel Corp

Decision Tree Initial Setup


65% Strong Demand 200

Build New Plant

-120

35%
Weak Demand

Build or Upgrade
Strong Demand Upgrade Existing Plant

90 65% 120

-50 35% Weak Demand 60

Calculate Node Values


65% Strong Demand 200 200 -120

Build New Plant

-120

35%
Weak Demand

90-120 = 90 65% 120

Build or Upgrade
Strong Demand Upgrade Existing Plant

120-50=7

-50 35% Weak Demand 60

60-50=10

Calculate EMV of Build New Plant Options


65% Strong Demand 200 -120 200 .65 x 80 = 52 -120 .35 x -30 = -10.5 Weak Demand

Build New Plant

35%
90 65% 120

90-120 =

Build or Upgrade
Strong Demand Upgrade Existing Plant

120-50=7

-50 35% Weak Demand 60

60-50=10

Calculate Net Value of Build New Plant Node


65% Strong Demand 200 -120 200 .65 x 80 = 52 -120 52 + (-10.5) = 41.5 .35 x -30 = -10.5 Weak Demand

Build New Plant

35%
90 65% 120

90-120 =

Build or Upgrade
Strong Demand Upgrade Existing Plant

120-50=7

-50 35% Weak Demand 60

60-50=12

Calculate EMV of Upgrade Existing Plant Options


65% Strong Demand 200 -120 200 .65 x 80 = 52 -120 52 + (-10.5) = 41.5 .35 x -30 = -10.5 Weak Demand

Build New Plant

35%
90 65% 120

90-120 =

Build or Upgrade
Strong Demand Upgrade Existing Plant .65 x 70 = 45.5 -50

120-50=7

.35 x 10 = 3.5 Weak Demand

35% 60

60-50=10

Calculate Net Value of Upgrade Existing Plant Node


65% Strong Demand 200 -120 200 .65 x 80 = 52 -120 53 + (-10.5) = 41.5 .35 x -30 = -10.5 Weak Demand

Build New Plant

35%
90 65% 120

90-120 =

Build or Upgrade
Strong Demand Upgrade Existing Plant .65 x 70 = 45.5 -50 45.5 + 3.5 = 49 .35 x 10 = 3.5 Weak Demand

120-50=7

35% 60

60-50=10

Place the highest Net Value in the Decision node and mark that path as True or Yes. Mark the other path as False or No.
65% Strong Demand 200 -120 200 .65 x 80 = 52 53 + (-10.5) = 41.5 .35 x -30 = -10.5 Weak Demand

Build New Plant

No -120

35%
90 65% 120

90-120 =

Build or Upgrade

49 Strong Demand Upgrade Existing Plant Yes -50 .65 x 70 = 45.5 45.5 + 3.5 = 49 .35 x 10 = 3.5 Weak Demand

120-50=7

35% 60

60-50=10

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