Fold back the tree and find the expected value

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Reference no: EM132183042

Gerard is currently a director for an established consulting company making $150,000 in base pay p.a. He is also eligible for a bonus at the end of the year of 5% of all revenues if the company makes above $800,000 and 10% of all revenues if above $1.5 million. He is debating whether to leave his lucrative job to set up his own company. Although he has established client relationships, he believes only 65% of all existing clients will follow him if he sets up his own business. Based on previous years performance he believes there is a 25% chance the contracts would be worth $600,000; a 45% chance the contracts would be worth $1 million and a 30% chance the contracts will be worth $1.5 million. He estimates that the total cost of operating his own company would be $350,000.

a. Develop a decision tree to help Gerard decide whether he should set up his own company.

b. Fold back the tree and find the expected value.

Reference no: EM132183042

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