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Operations Research: Group Assignment On

This document summarizes a group assignment analyzing a decision tree case study. It outlines the steps taken to analyze the decision tree, including: [1] calculating the total profit for each terminal node path, [2] working backwards to calculate the expected monetary value (EMV) at each chance and decision node, and [3] determining that the optimal decision is to tender for contract C1 only at a price of £110K, which has the highest EMV of £26.2K but carries the risk of a potential £52K loss if unsuccessful.

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Surbhi Sabharwal
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15 views6 pages

Operations Research: Group Assignment On

This document summarizes a group assignment analyzing a decision tree case study. It outlines the steps taken to analyze the decision tree, including: [1] calculating the total profit for each terminal node path, [2] working backwards to calculate the expected monetary value (EMV) at each chance and decision node, and [3] determining that the optimal decision is to tender for contract C1 only at a price of £110K, which has the highest EMV of £26.2K but carries the risk of a potential £52K loss if unsuccessful.

Uploaded by

Surbhi Sabharwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Operations Research

Group Assignment
On
“Case Study 6 - Decision Tree”

(TERM-III; Batch 2019-21)

Under the Supervision of

Prof. Sonali Singh

Submitted by:
Ankush Birla – PGFA 1910
Surbhi Sabharwal – PGFA 1957
Utkarsh Padiyar – PGFA 1959
Yash Batra -PGFA 1960
Ravina Singh- PGFA 1941
Solution of Case 6

Step 1

 path to terminal node 12 - we decide to tender for C1 only at a price of 120K


and are successful
Total revenue = 120; Total cost = 50 + 18 + 2 = 70 and Total profit = 50
(all figures in £K)
 path to terminal node 13 - we decide to tender for C1 only at a price of 120K
but are unsuccessful

Total revenue = 0; Total cost = 50 + 2 = 52 and Total profit = -52

 path to terminal node 14 - we decide to tender for C1 only at a price of 110K


and are successful

Total revenue = 110; Total cost = 50 + 18 + 2 = 70 and Total profit = 40

 path to terminal node 15 - we decide to tender for C1 only at a price of 110K


but are unsuccessful

Total revenue = 0; Total cost = 50 + 2 = 52 and Total profit = -52

 path to terminal node 16 - we decide to tender for C2 only at a price of 70K


and are successful

Total revenue = 70; Total cost = 24 + 12 + 2 = 38 and Total profit = 32

 path to terminal node 17 - we decide to tender for C2 only at a price of 70K


but are unsuccessful

Total revenue = 0; Total cost = 24 + 2 = 26 and Total profit = -26

 path to terminal node 18 - we decide to tender for C2 only at a price of 65K


and are successful

Total revenue = 65; Total cost = 24 + 12 + 2 = 38 and Total profit = 27

 path to terminal node 19 - we decide to tender for C2 only at a price of 65K


but are unsuccessful

Total revenue = 0; Total cost = 24 + 2 = 26 and Total profit = -26

 path to terminal node 20 - we decide to tender for C2 only at a price of 60K


and are successful
Total revenue = 60; Total cost = 24 + 12 + 2 = 38 and Total profit = 22

 path to terminal node 21 - we decide to tender for C2 only at a price of 60K


but are unsuccessful

Total revenue = 0; Total cost = 24 + 2 = 26 and Total profit = -26

 path to terminal node 22 - we decide to tender for C1/C2 at a price of 190K


and are successful

Total revenue = 190; Total cost = 50 + 18 + 10 + 3 = 81 and Total profit = 109

 path to terminal node 23 - we decide to tender for C1/C2 at a price of 190K


but are unsuccessful

Total revenue = 0; Total cost = 50 + 3 = 53 and Total profit = -53

 path to terminal node 24 - we decide to tender for C1/C2 at a price of 140K


and are successful

Total revenue = 140; Total cost = 50 + 18 + 10 + 3 = 81 and Total profit = 59

 path to terminal node 25 - we decide to tender for C1/C2 at a price of 140K


but are unsuccessful

Total revenue = 0; Total cost = 50 + 3 = 53 and Total profit = -53

 path to terminal node 26 - we decide to tender for C1/C2 at a price of 100K


and are successful

Total revenue = 100; Total cost = 50 + 18 + 10 + 3 = 81 and Total profit = 19

 path to terminal node 27 - we decide to tender for C1/C2 at a price of 100K


but are unsuccessful

Total revenue = 0; Total cost = 50 + 3 = 53 and Total profit = -53

 path to terminal node 28 - we decide not to tender at all

Total revenue = 0; Total cost = 0 and Total profit = 0

Hence, we can form the table below indicating for each branch the total profit
involved in that branch from the initial node to the terminal node.

Terminal node Total profit (£K)


12   50  
13   -52  
14   40  
15   -52  
16   32  
17   -26  
18   27  
19   -26  
20   22  
21   26  
22   109  
23   -53  
24   59  
25   -53  
26   19  
27   -53  
28   0  

We can now carry out the second step of the decision tree solution procedure where
we work from the right-hand side of the diagram back to the left-hand side.

Step 2

Consider chance node 1 (with branches to terminal nodes 12 and 13 emanating from
it). The expected monetary value (EMV) for this chance node is given by 0.3 x (50) +
0.7 x (-52) = -21.4

Consider chance node 2, the EMV for this chance node is given by 0.85 x (40) +
0.15 x (-52) = 26.2

Then for the decision node relating to the price for C1 we have the two alternatives:

(5) price 120K EMV = -21.4

(6) price 110K EMV = 26.2

It is clear that, in £ terms, alternative 6 is the most attractive alternative and so we


can discard the other alternative.

Continuing the process, the EMV for chance node 3 is given by 0.10 x (32) + 0.9 x (-
26) = -20.2

The EMV for chance node 4 is given by 0.60 x (27) + 0.40 x (-26) = 5.8

The EMV for chance node 5 is given by 0.90 x (22) + 0.10 x (-26) = 17.2

Hence for the decision node relating to the price for C2 we have the three
alternatives:
(7) price 70K EMV = -20.2

(8) price 65K EMV = 5.8

(9) price 60K EMV = 17.2

It is clear that, in £ terms, alternative 9 is the most attractive alternative and so we


can discard the other two alternatives.

Continuing the process, the EMV for chance node 6 is given by 0.05 x (109) + 0.95 x
(-53) = -44.9

The EMV for chance node 7 is given by 0.65 x (59) + 0.35 x (-53) = 19.8

The EMV for chance node 8 is given by 0.95 x (19) + 0.05 x (-53) = 15.4

Hence for the decision node relating to the price to charge for C1 and C2 we have
the three alternatives:

(10) price 190K EMV = -44.9

(11) price 140K EMV = 19.8

(12) price 100K EMV = 15.4

It is clear that, in £ terms, alternative 11 is the most attractive alternative and so we


can discard the other two alternatives.

Hence for the decision node relating to the tender decision we have the four
alternatives:

(1) C1 only EMV = 26.2

(2) C2 only EMV = 17.2

(3) C1 and C2 EMV = 19.8

(4) no tender EMV = 0

It is clear that, in £ terms, alternative 1 is the most attractive alternative and so we


can discard the other three alternatives.

Hence, we recommend that the company tenders for contract C1 only, with a tender
price of £110K because this alternative has the highest EMV of £26.2K.

If the company follows this recommendation the actual outcome will be one of the
terminal nodes 14 or 15 (depending upon chance events) i.e. the outcome will be
one of [40, -52]. Hence the downside is that the company may lose £52K (if their
tender is unsuccessful).

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