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Decision Tree Tutorial

The company is considering developing a new product with a 40% chance of success and 60% chance of failure. Developing the product costs $200,000. If successful, the company must choose to build a large or small manufacturing plant. There is a 75% chance of high demand and 25% chance of low demand. A large plant has a higher expected value under high demand but lower under low demand, while a small plant has a consistent expected value.

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Shilongo Olivia
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90 views1 page

Decision Tree Tutorial

The company is considering developing a new product with a 40% chance of success and 60% chance of failure. Developing the product costs $200,000. If successful, the company must choose to build a large or small manufacturing plant. There is a 75% chance of high demand and 25% chance of low demand. A large plant has a higher expected value under high demand but lower under low demand, while a small plant has a consistent expected value.

Uploaded by

Shilongo Olivia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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DECISION TREE TUTORIAL

A company is considering whether to develop and market a particular product. There is 40% probability
that the research and development department will come up with a viable product, and a 60%
probability that the product will be scrapped. The cost of undertaking the research and development
is N$200 000.

If the product development is successful, the company will build a plant. The product demand is
unknown, and the company has the choice of building a large or small plant. The expected demand
and net present value is shown below:

High demand Low demand


Action Probability 75% Probability 25%
Large plant N$1 600 000 N$400 000
Small plant N$1 000 000 N$1 000 000

Required:
Advise the company on the most beneficial course of action using a decision tree

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