Decision trees 1 A business is considering developing and launching a new product at an estimated cast af US$250,000. The manager has decided to use a decision tree with a 65% probability of the new product being a commercial succes. If so, this should lead to an additional US$500,000 in sales revenue. The probability of failure is 35%, which would lead to additional sales of only US$50,000. ‘a Define the term decision tree. [2 marks) b Calculate the expected value of the new product for the busines. (2 marks] ¢ Explain one advantage of using decision trees as a decision-making tool forthe busines. 2 marks]6 Dedsion trees _25 2. Ed Jaen nuns a car repairs and restoration business in Panama City. He is deciding whether to open a new outlet in the city or upgrade the entire machinery at the existing site, The data below show the figures forecast for each option. Cost of investment 1U5580,000 Probability of revenue beng US$ 120,000 07 Frobability of revenue beng USS40,000 03 CE eee rd Cost of investment 1US$60,000) Frobablly of revenue beng US$90,000 08 Frobabily of revenue beng US$60.000 02 a Calculate the expected value and net gain of both options, tameria b Based on the data, outline which growth option Ed Jaen should choose. [2mertal Explain two advantages of using decision trees. tamarke) d_ Explain two disadvantages of using decision trees. [4 marks)26 _ Business Management Toolkit Workbook for the IB 3) The management at Virginie Srienz Roigt Consulting (VSRC) is considering whether to introduce a new advertising campaign (which would cost US$80m) or spend more money on an existing campaign (which would cost USS30m) in an attemp¢ to increase sales revenue. The probability of each option is shown below. There is an estimated 60% chance of success ifthe new campaign is chosen, which is expected to gain VSRC US$130m in sales revenue. There isa 40% chance of failure for the new advertising campaign, with expected sales revenues of only US$75m. IfVSRC sticks with the existing campaign, there is an 80% chance of success of earning USS80m. If the project fails, for which there is a 20% chance, the likely outcome is revenue of just US$35m. a Use the information above to construct a decision tree for VSRC. [Gmarks)6 Decision trees _27 b- Comment on the findings shown in the decision tree for VSRC, [2 marks} 4 Tilak KC Co. is considering expanding into one of three locations. The expected costs and revenues are shown in the table below. The company has the resources to pursue only one of these options. ens Probability (%) Ears) err) ‘Ahmedabad 95 High sales 60 220 Low sales 40 85 Bengaluru 85 High sales 50 20 Low sales 50 75 chennai 109 High sales 65 190 Low sales 35 9028 Business Management Toolkit Workbook for the 18 Diploma a Construct a decision tree diagram for Tilak KC Co., showing which project is best on financial grounds. Show all your working and include an appropriate key in your diagram. [6mars) b Comment on the findings shown in the decision tree for Tilak KC Co. [2 marks}6 Dedsion trees_29 5 Marcia Holtz Bikes (MHB) produces bicycles in a large factory. Government data suggest that there is a 45% chance of the economy improving during the next three years, with a 35% chance of it remaining unchanged and only a 20% chance of it worsening. Hence, MHB is considering three growth options: Option one: launch a new line of foldable bikes, costing an estimated USS$2.5m. ¢- Option two: build a new factory to increase productive capacity, costing an estimated US$4.5m. jon three: diversify by building skateboards to add to its current product portfolio, costing an estimated The estimated sales revenue of these options is shown below. aL oa cere peck (ED) (Ussm) (ussm) Improves 5 8 3 Unchanged 2 5 2 Worsens Zz 3 1 a Construct a decision tree diagram for MHB and calculate the predicted outcome for each option. [6 marks]30 _ Business Management Toolkit Workbook for the 18 Diploma b_ With reference to the decision tree, comment on which growth option MHB should pursue, (emarts) 6 Inline with the firm's mission statement, Géade Torun Florists is considering two growth options: ‘© Option one: open a second store in a nearby location. ‘¢ Option twos refurhish its existing store, which has not happened since the owner opened for husiness over five years ago. There is also the option to do nothing if these growth options both prove to be too risky. Parts of the decision tee for Gude Torun Florists are shown below. Succere $460,000.06) Option + 12200000) Faure $200,000.0.4) success omen $760,000(075) A ($110,000) fale 3739.000(075) Option 3 ido nothing) (60) 9 a Complete the decision tree above to determine which project Gozde Torun Florists should pursue (show all ‘your working out). (6marks} Working out:6 Dedsion trees _31 b Explain two reasons in favour of Gésde Torun Florists opening a second store ina nearby location (option one). lamarks} Explain two reasons in favour of Gésde Torun Florists refurbishing its current store (option two). [4merks]32__ Business Management Toolkit Workbook for the (8 Diploma 7 Kinny Baloo Corp. furniture: @ Option one: above the line (ATL) promotion. ‘¢ Option two: below the line (BTL) promotion. ¢- Option three: through the line (TTL) promotion. considering alternative methods of promotion for its latest product line of garden Cost ($) Option one: ATL 150,000 07 . Option two: BTL 50,000, Os 400,000, (00,000 (Option three: TTL 100,000 O6 450,000 25,000 2 Define the term through the line (TTL) promotion. [2 marks} b Construct a decision wee diagram for Kinny Baloo Corp. and calculate the predicted outcome for each option. [6 marks}