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Result C1 Calculation Payoff Decision D1

The document discusses expected monetary value (EMV) and using a decision tree analysis to calculate EMV at different decision points to determine the best course of action. It provides an example decision tree with two initial decisions of developing a new product line vs modifying an existing one and calculates the EMV for each. It then rolls up the EMV calculations to the first decision node to determine the overall best option is to not develop any project.

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Prajakta
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30 views11 pages

Result C1 Calculation Payoff Decision D1

The document discusses expected monetary value (EMV) and using a decision tree analysis to calculate EMV at different decision points to determine the best course of action. It provides an example decision tree with two initial decisions of developing a new product line vs modifying an existing one and calculates the EMV for each. It then rolls up the EMV calculations to the first decision node to determine the overall best option is to not develop any project.

Uploaded by

Prajakta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

EMV = Expected monetary valu

Decision
D1 Result C1 Calculation Payoff
Do not Cost = 0,
develop No action Revenue=0 0
Unsucces Revenue=-
Develop sful 500,000 -500,000
Go to decision
Successful D2

Decision
D2 Result C2 Calculation Payoff

High Incremental
Build New demand revenue- 400000
Productio Development
n Low cost-Building
Line(NPL) demand cost -100,000
High Incremental
demand revenue- 250000
Modify Development
product cost-Building
line(MPL) cost
Incremental
revenue-
Modify Development
product Low cost-Building
line(MPL) demand cost -450,000 250000 -450000

Start with D2 and come bck to D1 for decision tree analysis

Expected monetory value(EMV) = Probability x Payoff


Decision D2: New product line vs Modified product line
NPL
EMV High demand+low demand
100000

MPL High demand + Low demand


EMV -170000

Decision D1: Develop or do not develop


Total EMV EMV of successful development + EMV of unsuccessful development
-80000

It is better to not develop any project.


EMV = Expected monetary value

succ d2
dev c1
d1 no suc
no dev
high 0.4
npl c2 low 0.6

mpl c2 high 0.4


low 0.6
b
succ d2
a c1 stop
d1 unsuc

b c1 a
succ d2
stop
unsuc

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