Description
the decision tree is provided , please check attachment
A company is deciding whether to develop and launch a new product. Research and development costs are expected to be $300,000 and there is a 60% chance that the product launch will be successful, and a 40% chance that it will fail.
If it is successful, the levels of expected revenue and the probability of each occurring have been estimated as follows, depending on whether the product popularity is high, medium or low:
Probability Revenue
High: 0.25 $500,000 per year for two years
Medium: 0.45 $400,000 per year for two years
Low: 0.3 $300,000 per year for two years
If it is a failure, there is a 0.55 probability that the research and development work can be sold for $60,000 and a 0.45 probability that it will be worth nothing at all.
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Explanation & Answer
See attached:)
Do not develope
0
New Tree
Decision
25.0%
High
$1,000,000.00
60.0%
Success
Chance
0
#NAME?
45.0%
Medium
$800,000.00
30.0%
low
$600,000.00
Devlope new product
#NAME?
Chance
-$300,000.00
#NAME?
Still work
55.0%
$60,000.00
Failure
40.0%
0
Chance
#NAME?
Work nothing
45.0%
0
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
PrecisionTree Sensitivity Analysis - Sensitivity Graph
Performed By: admin
Date: Sunday, February 24, 2019 12:22:43 PM
Output: Decision Tree 'New Tree' (Expected Value of Entire Model)
Input: Branch Value 'Medium' of Node 'Chance' (D15)
Sensitivity of Decision Tree 'New Tree'
Expected Value of Node 'Decision' (B9)
With Variation of Branch Value 'Medium' of Node 'Chance' (D15)
260000
240000
Expected Value
220000
200000
PrecisionTree Trial Version
180000
For Evaluation Purposes Only
160000
140000
Branch Value 'Medium' of Node 'Chance' (D15)
Sensitivity Data
Input
Output
#1
Value
Change (%)
$600,000.00
-25.00%
Value
Change (%)
133200
-28.85%
#2
$640,000.00
-20.00%
144000
-23.08%
#3
$680,000.00
-15.00%
154800
-17.31%
#4
$720,000.00
-10.00%
165600
-11.54%
#5
$760,000.00
-5.00%
176400
-5.77%
#6
$800,000.00
0.00%
187200
0.00%
#7
$840,000.00
5.00%
198000
5.77%
#8
$880,000.00
10.00%
208800
11.54%
#9
$920,000.00
15.00%
219600
17.31%
#10
$960,000.00
20.00%
230400
23.08%
#11
$1,000,000.00
25.00%
241200
28.85%
$1,050,000.00
$1,000,000.00
$950,000.00
$900,000.00
$850,000.00
$800,000.00
$750,000.00
$700,000.00
$650,000.00
$600,000.00
$550,000.00
120000
PrecisionTree Sensitivity Analysis - Sensitivity Graph
Performed By: admin
Date: Sunday, February 24, 2019 12:48:56 PM
Output: Decision Tree 'New Tree' (Expected Value of Entire Model)
Input: Branch Value 'low' of Node 'Chance' (D17)
Sensitivity of Decision Tree 'New Tree'
Expected Value of Node 'Decision' (B9)
With Variation of Branch Value 'low' of Node 'Chance' (D17)
220000
210000
Expected Value
200000
190000
PrecisionTree Trial Version
180000
For Evaluation Purposes Only
170000
160000
Branch Value 'low' of Node 'Chance' (D17)
Sensitivity Data
Input
Output
#1
Value
Change (%)
$450,000.00
-25.00%
Value
Change (%)
160200
-14.42%
#2
$480,000.00
-20.00%
165600
-11.54%
#3
$510,000.00
-15.00%
171000
-8.65%
#4
$540,000.00
-10.00%
176400
-5.77%
#5
$570,000.00
-5.00%
181800
-2.88%
#6
$600,000.00
0.00%
187200
0.00%
#7
$630,000.00
5.00%
192600
2.88%
#8
$660,000.00
10.00%
198000
5.77%
#9
$690,000.00
15.00%
203400
8.65%
#10
$720,000.00
20.00%
208800
11.54%
#11
$750,000.00
25.00%
214200
14.42%
$800,000.00
$750,000.00
$700,000.00
$650,000.00
$600,000.00
$550,000.00
$500,000.00
$450,000.00
$400,000.00
150000
PrecisionTree Sensitivity Analysis - Tornado Graph
Performed By: admin
Date: Sunday, February 24, 2019 1:17:38 PM
Output: Decision Tree 'New Tree' (Expected Value of Entire Model)
Tornado Graph of Decision Tree 'New Tree'
Expected Value of Entire Model
Branch Probability 'Success' of Node 'Chance' (C12)
Branch Value 'Medium' of Node 'Chance' (D15)
PrecisionTree Trial Vers...