Expert answer:decision tree

Expert answer:Read Case 6.3: Electronic Timing System for Olympics on pages 275-276 of the textbook. For this assignment, you will assess and use the correct support tool to develop a decision tree as described in Part “a” of Case 6.3. Analyze and apply the best decision making process to provide answers and brief explanations for parts “a”, “b”, “c”, and “d”. The answers and explanations can be placed in the same Excel document as the decision tree.
a.Develop a decision tree that can be used to solve Chang’s problem. You can assume in this part of the problem that she is using EMV (of her net profit) as a decision criterion. Build the tree so that she can enter any values for p1, p2, and p3 (in input cells) and automatically see her optimal EMV and optimal strategy from the tree.
b.If p2 = 0.8 and p3 = 0.1, what value of p1 makes Chang indifferent between abandoning the project and going ahead with it?
c.How much would Chang benefit if she knew for certain that the Olympic organization would guarantee her the contract? (This guarantee would be in force only if she were successful in developing the product.) Assume p1 = 0.4, p2 = 0.8, and p3 = 0.1
d.Suppose now that this is a relatively big project for Chang. Therefore, she decides to use expected utility as her criterion, with an exponential utility function. Using some trial and error, see which risk tolerance changes her initial decision from “go ahead” to “abandon” when p1 = 0.4, p2 = 0.8, and p3 = 0.1.
In your Excel document,
1.Develop a decision tree using the most appropriate support tool as described in Part a.
2.Calculate the value of p1 as described in Part b. Show calculations.
3.Calculate the possible profit using the most appropriate support tool as described in Part c. Show calculations.
4.Calculate risk tolerance as described in Part d. Show calculations.
case_study.txt

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Sarah Chang is the owner of a small electronics company. In six months, a
proposal is due for an electronic timing system for the next Olympic Games. For
several years, Chang’s company has been developing a new microprocessor, a
critical component in a timing system that would be superior to any product
currently on the market. However, progress in research and development has been
slow, and Chang is unsure whether her staff can produce the microprocessor in
time. If they succeed in developing the microprocessor (probability p1), there
is an excellent chance (probability p2) that Chang’s company will win the $1
million Olympic contract. If they do not, there is a small chance (probability
p3) that she will still be able to win the same contract with an alternative but
inferior timing system that has already been developed.
If she continues the project, Chang must invest $200,000 in research and
development. In addition, making a proposal (which she will decide whether to do
after seeing whether the R&D is successful) requires developing a prototype
timing system at an additional cost. This additional cost is $50,000 if R&D is
successful (so that she can develop the new timing system), and it is $40,000 if
R&D is unsuccessful (so that she needs to go with the older timing system).
Finally, if Chang wins the contract, the finished product will cost an
additional $150,000 to produce.
a. Develop a decision tree that can be used to solve Chang’s problem. You can
assume in this part of the problem that she is using EMV (of her net profit) as
a decision criterion. Build the tree so that she can enter any values for p1,
p2, and (in input cells) and automatically see her optimal EMV and optimal
strategy from the tree.
b. If p2 = 0.8 and p3 = 0.1, what value of p1 makes Chang indifferent between
abandoning the project and going ahead with it?
c. How much would Chang benefit if she knew for certain that the Olympic
organization would guarantee her the contract? (This guarantee would be in force
only if she were successful in developing the product.) Assume p1 = 0.4, p2 =
0.8, and p3 = 0.1.
d. Suppose now that this is a relatively big project for Chang. Therefore, she
decides to use expected utility as her criterion, with an exponential utility
function. Using some trial and error, see which risk tolerance changes her
initial decision from �go ahead� to �abandon� when p1 = 0.4, p2 = 0.8, and p3 =
0.1.
…
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