Decision Trees Management Coursework Research Paper
Use Microsoft Vizio® to draw your Decision Trees and prepare a document that answers these exercise questions.
Exercise 1
A firm must decide whether to construct a small, medium, or large manufacturing plant for pre-fabricated wall panels. A consultant’s report indicates a 20% probability that demand will be low and an 80% probability that demand will be high.
If the firm builds a small facility and demand turns out to be low, the profit will be £42m. If the demand turns out to be high, the firm can either subcontract and realize the profit of £42m or expand for a profit of £48m.
The firm could build a medium-size facility as a hedge: If demand is low, its profit is estimated at £22m; if demand turns out to be high, the firm could do nothing and realize a profit of £46m, or it could expand and realize a profit of £50m.
If the firm builds a large facility and demand is low, the loss will be £20m, whereas high demand will result in a profit of £72m. What should the company do?
Exercise 2
Eagle beverages limited wants to introduce a fruit-based drink in Spain. Eagle has assets of $300 million and is looking at different alternatives to market the drink.
- Alternative 1: Perform a test only in the Barcelona market area and then decide whether or not to market it nationally.
- Alternative 2: Introduce the beverage nationally without running any tests.
- Alternative 3: Without any testing decide not to introduce the beverage. If there is no market study, then it is believed that there is a 55% chance of success nationally.
If there is success nationally, then the assets for the company will grow by $600 million. If it fails then the assets will decrease by $200 million.
If there is a market study undertaken then the cost will be $60 million and the probability of local success in Barcelona is 60% with a 40% chance of failure. If there is success locally, then the probability of success nationally is 85%. If there is a local failure in Barcelona then the chances of national success are 10%. The company wants to maximize its success, so what should the company do?
Decision Trees
Name
Course
Instructor
Institution
Date
Exercise 1
A firm must decide whether to construct a small, medium, or large manufacturing plant for pre-fabricated wall panels. A consultant’s report indicates a 20% probability that demand will be low and an 80% probability that demand will be high.
If the firm builds a small facility and demand turns out to be low, the profit will be £42m. If the demand turns out to be high, the firm can either subcontract and realize the profit of £42m or expand for a profit of £48m.
The firm could build a medium-size facility as a hedge: If demand is low, its profit is estimated at £22m; if demand turns out to be high, the firm could do nothing and realize a profit of £46m, or it could expand and realize a profit of £50m.
If the firm builds a large facility and demand is low, the loss will be £20m, whereas high demand will result in a profit of £72m. What should the company do?
Decision tree
Alternatives
Low Demand
High Demand
Small plant
42
48
Medium plant
22
50
Large plant
-20
72
Using the net present value (NPV)
Small plant= 0.2*42 m+ 0.8*48m =£ 46.8 m
Medium plant=0.2*22 m+ 0.8*50m=£ 44.4 m
Large plant=0.2*-20m+ 0.8*72m =£ 53.6 m
In decision theory there are possible future conditions that depend on the decision, a list of alternatives and the expected payoffs for each alternative (Stevenson, 2018). The best alternative would be to build the large facility with NPV of £53.6 m, and if they were to subcontract the small plant and do nothing for the medium plant the decision would be the same. If the alternative with the highest payoff is chosen for low demand (maximin) the small plant has the highest payoff at £8.4 million and for the high demand, the highest payoff is for the large plant at £57.6 million.
Exercise 2
Eagle beverages limited wants to introduce a fruit-based drink in Spain. Eagle has assets of $300 millio...
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