SEU Probability and Decision Trees Essential Aspects in The Business World Discussion

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vunlln993

Business Finance

Saudi electronic university

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Decision Tree (100 points)

The supplement to Chapter 5 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.
  • Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources.
  • Use Saudi Electronic University academic writing standards and follow APA style guidelines.
  • It is strongly encouraged that you submit all assignments into Turnitin prior to submitting them to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin – Student Guide for step-by-step instructions.

Review the grading rubric to see how you will be graded for this assignment.

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Explanation & Answer

Attached. Please let me know if you have any questions or need revisions.

Running head: PROPABILITY AND DECISION TREES

Probability and Decision Trees
Student Name
Institution of Affiliation

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PROPABILITY AND DECISION TREES

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Probability and Decision Trees
Introduction
In the business world, decision making is an essential aspect of operations. Notably, a poor
investment decision can mean the loss of millions of dollars. To avoid such mistakes, a decision
tree concept has been developed, and it analyzes an option and projects possible consequences to
help a business make an informed and profitable decision. Notably, the decision tree analyzes a
problem by representing the issues diagrammatically to assess possible solutions. Additionally,
decision trees show all courses of action and their respective courses (Stevenson, 2018). This
ideology is useful for organizations, especially when there are many decisions to make with
respective outcomes at various decision-making nodes. In other words, decision trees help an
organization assess various courses of action, determine the costs associated with each course of
action, and reveal the best course of action that should be followed. This helps an organization
make an informed that is feasible and profitable, thus helping avoid the trap of poor investment
decisions that can cause financial damage to the business.
Components of a Decision Tree
The decision tree has around three critical components. The first one is the decision node,
the lines known as the branch, and the chance node, representing uncertain events after the decision
nodes. Notably...

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