Description
The supplement to Chapter 5 (Operations management Irwin Operations Decision Sciences 13th edition) in your textbook describes and develops several decision trees.
Address the following requirements:
Develop a decision tree for the case described.
Explain the process of developing a decision tree, draw the decision tree (include the decision tree in an appendix showing chance nodes, probabilities, outcomes, expected values, and net expected value).
Defend your final decision based on your decision tree.
Case for consideration—An operations manager for a cereal producer is faced with a choice of:
1.A large-scale investment (A) to purchase a new cooker which could produce a substantial pay-off in terms of increased revenue net of costs but requires an investment of 3,750,000 Saudi Riyal. After extensive market research it is thought that there is a 40% chance that a pay-off of 9,375,000 Saudi Riyal will be realized, but there is a 60% chance that it will be only 3,000,000 Saudi Riyal.
2.A smaller scale project (B) to refurbish an existing cooker. At 1,875,000 Saudi Riyal, this option is less costly but produces a lower pay-off. Again, extensive research data suggests a 30% chance of a gain of 3,750,000 Saudi Riyal but a 70% chance of it being only 1,875,000 Saudi Riyal.
3.Continuing the present operation without change (C) which cost nothing, but produces no pay-off.
Directions:
Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
Explanation & Answer
Attached.
Running head: DECISION TREE THEORY FOR CASE
Decision Tree for the Case
Name
Institutional Affiliations
Course
Date
DECISION TREE THEORY FOR CASE
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Decision Tree
The likely value for decision A = 0.4*562500 + 0.6*-750000 = 1800000
The likely value for decision B = 0.3*375000 + 0.7*0 = 562500
Investment A is the most desirable one to select.
Overview of the Case
The operations manager for the cereal producer is presented with a dilemma of choosing
whether to go by large investment, select a smaller project, or continue with the current
operations of cereals production as it is. If he chooses to go by the large scale investment, he
will have to buy a new cooker that can accrue more revenue than its investment cost. The large
scale investment needs 3.75 million Saudi Riyal and has a probability of 40% of accruing a
DECISION TREE THEORY FOR CASE
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payoff of 9,375,000 Saudi Riyal or 60% probability of accruing 3,000,000 Saudi Riyal. If the
manager goes by the small scale investment, he will have his cooker repaired at 1,875,000
Saudi Riyal but will incur less payoff. The smaller investment will accrue a 30 % probability
in a payoff of 3,750,000 Saudi Riyal or a 70% probability of accrue 1,875,000 Saudi Riyal.
These two investment choices' decision specifically relies on the probable payoffs that will be
realized from each investment option.
The operations manager for cereal producers will have to bear the consequences of the
investment choice that he will make. If he chooses to do the large scale investment, then he
will have to bear its consequences on the nature of the payoff outcome, and the same applies
to the smaller investment. If the manager decides not to undertake the investment, he will also
have to also bear the repercussions associated with not making an investment decision. The
operations manager is subjected to a dilemma on the decision to make. Investment decisions
are important for all organizations and must be made with great precision. This paper provides
insight on decision tree theory and its application based on the case provided to highlight the
risks versus benefits of making certain investment decisions.
Elements of Decision Tree
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