Expected future events along with their respective cash flow

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Reference no: EM13970853

A decision maker must decide whether or not automate a given process. Depending on the technological success of the automation project, the result will turn out to be either poor, fair, or excellent. The net payoffs for possible outcomes (expressed in the net present value) are - $90K, $40K, and $300K, respectively. The initially estimated probabilities that each outcome will occur are 0.5, 0.3, and 0.2 respectively. Suppose that it is possible for the decision maker to conduct a technology study at the PW cost of $10K. The study should disclose that the enabling technology is either “shaky”, “promising” or “solid” with the probabilities of 0.41, 0.35, and 0.24 respectively.

Draw the decision tree diagram for this problem.

Show the expected future events (outcomes), along with their respective cash flows and probabilities of occurrence.

Hint: The general approach is to find the action or alternative that will maximize the expected net present value equivalent of future cash flows at each decision point, starting with the furthest decision point(s) and then rolling back until the initial decision point is reached

Reference no: EM13970853

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