Critical Thinking 6
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:
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.
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.
Continuing the present operation without change (C) which cost nothing, but produces no pay-off