DriveTek Problem DriveTek Research Institute discovers that a computer company wants a new tape drive for a proposed

new computer system. Since the computer company does not have research people available to develop the new drive, it will subcontract the development to an independent research firm. The computer company has offered a fee of $250,000 for the best proposal for developing the new tape drive. The contract will go to the firm with the best technical plan and the highest reputation for technical competence. DriveTek Research Institute wants to enter the competition. Management estimates a cost of $50,000 to prepare a proposal with a fifty-fifty chance of winning the contract. However, DriveTek's engineers are uncertain about how they will develop the tape drive if they are awarded the contract. Three alternative approaches can be tried. The first approach is a mechanical method with a cost of $120,000, and the engineers are certain they can develop a successful model with this approach. A second approach involves electronic components. The engineers estimate that the electronic approach will cost only $50,000 to develop a model of the tape drive, but with only a 50 percent chance of satisfactory results. A third approach uses magnetic components; this costs $80,000, with a 70 percent chance of success. DriveTek Research can work on only one approach at a time and has time to try only two approaches. If it tries either the magnetic or electronic method and the attempt fails, the second choice must be the mechanical method to guarantee a successful model. The management of DriveTek Research needs help in incorporating this information into a decision to proceed or not. The tutorial tab has step-by-step instructions for building the DriveTek decision tree.

219576899.xls.ms_office

Problem

1:24 AM

3/30/2014

14..Terminal dialog box. In the TreePlan. and click OK.xls. and enter "Electronic failure. In the TreePlan. 2. Select cell G3. choose Move or Copy Sheet.." 7. select Paste subtree. 4.Terminal dialog box." Select cell M7.. The tree is redrawn. select Copy subtree. and click OK. or select the circle graphic object in cell O10. From the Tools menu. Select cell O10.." Select cell Q16.xla. or select the triangle graphic object in cell K3. In the TreePlan. Select cell K3." Select cell M9. choose Decision Tree. and enter "-120000.. 8. Do not type the quotation marks in the following instructions. The tree is redrawn. Select cell B1. and enter "Use mechanical method. In the TreePlan. choose Decision Tree. and click OK.. From the Tools menu. From the Tools menu. select Change to decision node. and enter "-50000. and enter "Don't prepare proposal. From the Tools menu. 13. 12.70... choose Decision Tree.Event dialog box." Select cell M4. In the TreePlan. Alternatively." 9. and enter "Prepare proposal. and enter "Magnetic success. and click OK.Terminal dialog box. choose Decision Tree. and click OK. 10. Select cell O18. In the TreePlan. and enter "-120000. The tree is redrawn. and enter "Try magnetic method. 6." Select cell M14. select Three branches.. or select the triangle graphic object in cell S13. for instructions. The tree is redrawn. search Excel's help for "installing or removing an add-in. select Change to decision node.Terminal dialog box. and click OK. or select the triangle graphic object in cell O18. and enter "Awarded contract. Double-click the Tutorial (2) sheet tab. The tree is redrawn. In the lower left corner of the Move or Copy dialog box. Activate the Tutorial sheet. and enter "Not awarded contract. and enter "-50000. From the File menu. select One branch." 3." Select cell Q12. From the Tools menu. or select the triangle graphic object in cell O8. and click OK.. and enter "-80000. Select cell O8. and copy M4 and paste into U14. From the Tools menu." Alternatively.xla on the hard disk. choose Decision Tree. Select cell U12.New dialog box. select Two branches." Select cell E7.Terminal dialog box. install TreePlan." Select cell M12." Select cell I4. Navigate to TreePlan. In the TreePlan. and click OK." 5. select Change to event node. and enter "Try electronic method.DriveTek Tutorial 1. A decision node with two branches appears. and enter "+250000. check the Create a Copy box. click the New Tree button. and enter "Electronic success. 11. and rename the sheet DriveTek. Select cell I2. Select cell E2. select Two branches. or select the triangle graphic object in cell G3." Select cell U14. choose Open. Select cell M2. choose Decision Tree. From the Tools menu. copy M2 and paste into U12. select Change to event node.. choose Decision Tree. Select cell Q7..ms_office Tutorial 1:24 AM 3/30/2014 .." 219576899." Select cell I7. and enter "0. Select cell S13. From the Edit menu." Select cell E4. and enter "Use mechanical method." Select cell Q17..

and enter "0. if Awarded the contract. 2 in cell K11. 219576899." Select cell Q22. is to Try the electronic $150.000. with probabilities 0. 1 in cell C26.xls.000 in cell B27 is the expected value of the optimal strategy. +$30. and enter "Magnetic failure. The complete decision tree is the same as the Base Case sheet. and 0.25." 15.Select cell Q21. respectively.ms_office Tutorial 1:24 AM 3/30/2014 .30. and -$50.50. except for formatting. The initial choice. the subsequent choice.25. The rollback CE/EV +$20. 0.000. is to Prepare the proposal.000.

000 $0 Use mechanical method $0 $0 +$120.000 -$120.50 Awarded contract 2 +$250.000 +$90.ms_office Base Case 1:24 AM 3/30/2014 .000 +$20.000 0.000 +$84.50 Electronic failure 1 $0 0.xls.000 +$30.70 Magnetic success Prepare proposal Try magnetic method -$50.000 Don't prepare proposal $0 $0 $0 219576899.000 +$120.000 -$80.000 Use mechanical method +$30.000 0.000 0.000 0.000 -$120.50 Not awarded contract -$50.000 $0 -$120.000 Try electronic method $0 +$150.000 +$80.DriveTek Base Case Use mechanical method +$80.000 +$90.000 -$50.50 Electronic success +$150.000 0.30 Magnetic failure 1 $0 1 +$20.000 +$30.000 $0 -$50.

Enter a formula for the associated choice =J11 in AE2. and point to cell AA3 or type AA3. You can verify this by typing -$100. (3) Try different negative cash flows in cell AA3 to verify that the branch cash flows are updated and the decision tree formulas are recalculating.000 AC AD Cost -120000 -118000 -116000 -114000 -112000 -110000 -108000 -106000 -104000 -102000 -100000 -98000 -96000 -94000 -92000 -90000 AE Choice 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Y How cheap must the mechanical method be so that it's the best choice to use first if you're awarded the contract? (1) Select a cell where you can enter the cost of the mechanical method. select the range edit box for Column input cell. construct a data table.000. (2) Replace the three -$120. indicating that if the mechanical method costs $90. and T24. USF 1999-03-02 Z AA AB Assumption (Input) Mechanical Cost -$120. Click OK. On the decision tree. For example.000 in AA3. note that the expected values in cells M4 and M11 are the same. In the Table dialog box. Select AD2:AE18. 1999-03-02 . See AD3:AD18.219576899. (4) To automate the sensitivity analysis. try -$90. See cells L4.xls. (5) The data table results indicate that the cost of the mechanical method must be $100.000 or less for it to be the best choice if you're awarded the contract. then it's the best choice. McLaren. See AA3. in which case the formula in cell J11 displays 1 instead of 2. leave the range edit box for Row input cell blank. Enter a list of mechanical costs in a column. T14. < Correction.000 branch cash flows under the "Use mechanical method" branches with a formula referring to cell AA3.000 in cell AA3. from the Data menu choose Table.ms_office Mechanical Cost Sensitivity Mike Middleton.

000 Prepare proposal Try magnetic method -$50.50 Not awarded contract $0 -$50.Inputs & Outputs Use mechanical method -$120.000 0.000 +$90.000 1 +$20.000 Don't prepare proposal $0 $0 Page 6 .000 +$20.000 +$84.000 +$80.50 Awarded contract 2 +$250.000 -$80.000 0.000 +$90.000 Try electronic method -$50.

000 $0 Use mechanical method $0 +$120.000 $0 0.000 +$30.000 Use mechanical method +$30.70 Magnetic success +$120.000 +$150.000 $0 Page 7 .000 -$50.000 0.50 Electronic failure 1 $0 0.000 $0 0.50 Electronic success +$150.30 Magnetic failure 1 $0 $0 -$120.Inputs & Outputs +$80.000 +$30.000 -$120.

000 +$84.000 +$90.000 -$80.000 +$90.000 0.000 +$20.000 Prepare proposal Try magnetic method -$50.Strategy Region Table Use mechanical method -$120.000 Try electronic method -$50.50 Not awarded contract $0 -$50.000 +$80.000 0.000 1 +$20.50 Awarded contract 2 +$250.000 Don't prepare proposal $0 $0 Page 8 .

Strategy Region Table +$80.000 -$50.70 Magnetic success +$120.000 $0 Page 9 .50 Electronic success +$150.000 $0 0.000 $0 0.000 +$30.000 -$120.000 0.000 $0 Use mechanical method $0 +$120.000 Use mechanical method +$30.30 Magnetic failure 1 $0 $0 -$120.000 +$150.50 Electronic failure 1 $0 0.000 +$30.

39356828 -$80.000 1336.000 73034.50 Awarded contract 1 +$250.38493697 Page 10 .000 0 Don't prepare proposal $0 $0 0.39356828 0.53846 0.76000495 1 1336.53846 0.78713656 0.50 Not awarded contract $0 -$50.Risk Attitude Use mechanical method -$120.000 80000 0.9772 0.78713656 Try electronic method -$50.5626 0.000 +$80.000 0.78065737 Prepare proposal Try magnetic method -$50.000 78306.

000 $0 0.70 Magnetic success +$120.000 0.38493697 Use mechanical method $0 +$120.50 Electronic failure 1 $0 0.000 +$30.38493697 -$120.000 0.000 $0 Page 11 .Risk Attitude +$80.50 Electronic success +$150.000 $0 0.92074836 30000 0.30 Magnetic failure 1 $0 $0 0.56131474 -$120.000 0.56131474 Use mechanical method +$30.000 $0 0.000 +$150.000 1 -$50.

to construct the TreeDiagram. To the right of the terminal nodes. Decision nodes also have a number in them indicating the optimal branch. On the right side of each branch of the tree diagram. To build a new decision tree.. and 97). select the square cell next to the vertical line at the end of a terminal branch. choose New Tree. The tree diagram begins with the upper left corner of the diagram near the active cell at the time New. CAUTION: Do not insert or delete rows or columns in the Page 12 . On the left side of each branch of the tree diagram. TreePlan automatically puts formulas on your worksheet for evaluating these trees. To select a terminal node in Excel 97.. there is a rollback Expected Value field below the line near each node. TreePlan uses the TreeData range. and expected value of successor EVs at an event node. first create a new worksheet. 5. When the TreePlan. TreePlan builds a tree diagram with an initial decision node and two branches. TreePlan automatically puts the rollback EV formula into this cell: maximum of successor EVs at a decision node. 7.New dialog box appears. or (2) Press the shortcut key: Control + t. select a node. 7.and 97 for Windows and Macintosh 1. there is also a probability field above the name field. from the Options menu (Excel 4) or the Tools menu (Excel 5. start TreePlan.. Then start TreePlan in one of two ways: (1) Choose Decision Tree.61 TreePlan helps you build and modify decision tree diagrams in Excel worksheets.. To change the structure of the tree diagram. is chosen. near cell GV1000.TreePlan Help TreePlan for Excel (Unregistered) Decision Tree Software Add-In for Microsoft Excel 4. there is a name field above the branch line and a partial-cash-flow value field below the line. TreePlan assigns the name TreeDiagram to the range of the tree diagram and initially sets Excel's Print_Area equal to TreeDiagram. there is an endpoint value field that sums all of the partial cashflows in the tree. On the left side of event branches.. Internally. and choose commands from a TreePlan dialog box..

Remove branch Erases the selected node. Change to terminal Changes the selected node to a terminal node.. Shorten tree Removes the selected node and its single successor branch. TREEPLAN. and any successor branches and nodes. Change to event Changes the selected decision node to an event node..TERMINAL dialog box Change to decision node Changes the selected terminal node to a decision node with one to five successor branches. Modify the tree diagram only by using TreePlan's menu options.DECISION and TREEPLAN.. TREEPLAN.EVENT dialog boxes Add branch Adds a single branch after the selected node . the previous branch.TreePlan Help TreeDiagram or TreeData ranges.) Copy subtree Copies the selected node and all its successors to the TreePlan clipboard. Insert event Inserts an event node and single branch before the selected node. (No more than 5 branches are allowed. Insert decision Inserts a decision node and single branch before the selected node. All successor branches are erased. Change to decision Changes the selected event node to a decision node and erases the probability fields from the event branches. Change to event node Changes the selected terminal node to an event node with one to five successor branches.... Page 13 .

OPTIONS dialog box Certainty Equivalents The default is to rollback the tree using expected values.. If you chose to use exponential utilities. they are initially defined as A=1.. select the appropriate option button. B. NOTE: TreePlan uses the name RT to represent the risk tolerance parameter of the exponential utility function. If the names A.. select the appropriate option button. TreePlan uses the name MinimizeCosts as a flag Page 14 . and for the Minimize option. Remove previous branch Erases the selected terminal node and the previous branch. (In large trees. For the Maximize option.SELECT dialog box Cells To select a set of nonadjacent cells for subsequent formatting. and decisions are made by choosing the minimum expected value/CE rather than the maximum. The name UseExpUtility is a flag indicating whether to use exponential utilities or expected values.) Columns To select a set of nonadjacent columns for subsequent formatting. B=1.TreePlan Help Paste subtree Pastes the subtree onto the selected terminal node from the TreePlan clipboard. the cash flows are interpreted as costs. and select the Objects option button. (In large trees. Decision Node EV/CE Choices The default is to Maximize profits. this option may not be available. If you choose to Minimize costs instead.) Objects To select all objects. the rollback formulas are U=A-B*EXP(-X/RT) and X=-LN((A-U)/B)*RT. TREEPLAN. this option may not be available.. and RT don't exist. TreePlan will compute utilities and certainty equivalents at each node. the names A and B determine scaling. TREEPLAN. and RT=999999999999. U=A-B*EXP(X/RT) and X=LN((A-U)/B)*RT. choose Select Special from the Formula menu.

and Canada. bank) payable to Decision Support Services. TREEPLAN REGISTRATION TreePlan is distributed as shareware and may be provided at no charge to the user for evaluation. Make money order or check (in U.edu. If you find this program useful and continue to use TreePlan after a 30-day evaluation period. for adding exponential utility and several other features. $6. CA 94115 Voice/Fax (415) 673-6217 Compuserve 71330. Please contact Decision Support Services for details.00 shipping to U. you will be sent by postal mail a disk containing the most recent version of the software and documentation. and mail to: Decision Support Services 2105 Buchanan Street. Duke University.00 (California residents. An evaluation copy of TreePlan and other information may be obtained from the Decision Support Services web site: http://ourworld. #1 San Francisco.3445. funds drawn on a U. and academic pricing is available. Upon registering TreePlan. The registered TreePlan package has a 30-day money-back guarantee. Smith. The registration fee will license one copy for use on any one computer at any one time. or Internet: middleton@usfca.TreePlan Help indicating whether to maximize profits or minimize costs.3445 TREEPLAN REGISTRATION BY CREDIT CARD Page 15 . add sales tax) plus $4.compuserve.S.S. A site license agreement is required to use TreePlan on a computer network. you must make a registration payment to Decision Support Services. Registered users will be notified of the next major version and are entitled to unlimited technical support via postal mail.00 elsewhere.S. Compuserve 71330.com/homepages/decision TREEPLAN REGISTRATION BY CHECK The registration fee for TreePlan is $29. ACKNOWLEDGMENT Sincere thanks to Professor James E.

Any questions about the status of the shipment of the order. You can also mail credit card orders to PsL at P. CA 94115. ABOUT SHAREWARE Shareware is a method of distributing software that gives you a chance to try software before buying it. and individuals may distribute TreePlan as long as you clearly explain the shareware concept. or Discover from Public (software) Library by calling 800-2424-PsL or 713-524-6394 or by fax to 713-524-6398 or by Compuserve Email to 71355. The author cannot be reached at these PsL phone numbers. and we will ship the product directly to you. dealer pricing. Box 35705. The prices are $33 US/Canada and $35 overseas. San Francisco. #1. PsL will notify us the day of your order. product details. TREEPLAN DISTRIBUTION Please share copies of TreePlan freely with prospective users. To insure that you get the latest version. Houston. other distributors. non-credit card orders. you are expected to register. dealer pricing. TX 77235-5705. PsL has assigned item/product #11325 to TreePlan for Excel. 2105 Buchanan Street. or Decision Support Services. You are granted permission to make as many copies as you wish. and the fact that the price of your disks/CD-ROM/service is a copying fee only and does not constitute payment for the product. refunds.3445. or Decision Support Services. 2105 Buchanan Street. Please direct questions about volume discounts. the need for users to register the products they use. Amex. Compuserve 71330. rack vending.3445. The above numbers are for orders only.O. Visa.. etc. or other distribution methods to 415-673-6217 (Voice/Fax). volume discounts. San Francisco. book bundling. Compuserve 71330. registration options. Do not distribute copies that have been altered. If you try a shareware program and continue using it. Disk vendors. Individual programs differ on the details about Page 16 . must be directed to 415-673-6217 (Voice/Fax). bulletin boards.TreePlan Help You can order with MC. #1. technical support. site licenses. CA 94115.470.

ASP may be able to help. MI 49442-9427. Finally. You should try to find software that suits your needs and budget. or with some restrictions. This agreement shall be governed by the laws of the Page 17 . registration fee. Shareware authors specifically grant the rights to copy and distribute the software and documentation. Some states do not allow the exclusion of the limit of liability for consequential or incidental damages. shareware has the ultimate money-back guarantee: if you don't use it. without limitation. Fax 616-788-2765. If you are unable to resolve a shareware-related problem with an ASP member by contacting the member directly. The ASP Ombudsman can help you resolve a dispute or problem with an ASP member. but does not provide technical support for members' products. Also. whether it's commercial or shareware. either to all users and by all methods. but shareware makes finding the right program easier. The user assumes all risks as to the quality and performance of this software and documentation. The only meaningful difference between shareware and commercial software is the method of distribution. because shareware distribution costs are much lower.3536. because you can try before you buy. shareware prices are often lower. The author and Decision Support Services disclaim all warranties. or send a Compuserve message via Compuserve Mail to ASP Ombudsman 70007. The author and Decision Support Services assume no liability for indirect. and support. Muskegon. or incidental damages which may result from the use or misuse of TreePlan. Please write to the ASP Ombudsman at 545 Grover Road. ASP wants to make sure that the shareware principle works for you. and the copyright holder may choose to retain all rights. you don't pay for it. so the above limitation may not apply to you. the warranties of merchantability and of fitness for any purpose. expressed or implied. including. Copyright laws apply to both shareware and commercial software. consequential. too.TreePlan Help the evaluation period. Both types have good programs and bad. ASP OMBUDSMAN INFORMATION This program is produced by a member of the Association of Shareware Professionals (ASP). WARRANTY Users of TreePlan must accept this disclaimer of warranty: TreePlan copyrighted software and documentation are provided on an 'as is' basis.

USE OF SHAREWARE VERSION BEYOND 30 DAYS If you purchase one of the following textbooks. and assigns. Any action or proceeding brought by either party against the other arising out of or related to this agreement shall be brought only in a state or federal court of competent jurisdiction located in the city and county of San Francisco.TreePlan Help State of California and shall inure to the benefit of the author and Decision Support Services and any successors. you may continue to use the shareware version of TreePlan as long as you own the book: Ragsdale. Practical Management Science If you are a student. CA 94117 Internet: middleton@usfca. you may continue to use the shareware version of TreePlan for the academic year. AUTHOR INFORMATION Please send comments about TreePlan and suggestions for improvements to: Michael R. administrators. The parties hereby consent to in personam jurisdiction of said courts. faculty. California. Middleton All Rights Reserved 1. heirs.edu TreePlan for Excel (Unregistered) Copyright 1996 Michael R. or staff at a university that has an academic site license.61 Page 18 . Middleton McLaren School of Business University of San Francisco 2130 Fulton Street San Francisco. Spreadsheet Modeling and Decision Analysis Winston & Albright.

* in the Go To list box select TreeDiagram * click OK * hold down the shift key and from Excel's Edit menu select Copy Picture.Select dialog box select (Cells) Rollback EVs/CEs * click OK * from the Format menu choose Cells. the cells containing the list of probabilities...... in the Options dialog box select the View tab * in the View tab clear the check boxes for Formulas and Gridlines * click OK * from Excel's Edit menu select Go To.... * in the Table dialog box select the Column Input Cell field * enter a reference to the probability cell of interest * click OK Page 19 . Pasting Into Word To paste a copy of a decision tree into Word: * from Excel's Tools menu select Options. in the Format Cells dialog box select the Number tab * at the bottom of the Number tab select the Code field * type three semicolons as a custom code * click OK Use similar steps to hide all cells of any specific type.... * in the TreePlan... and the empty cells below the formula cell * from the Data menu select Table. * in the Copy Picture dialog box select (Appearance) As Shown when Printed * click OK * switch from Excel to Word * select an empty paragraph * from Word's Edit menu select Paste Probability Sensitivity Analysis (Two Branches) To see how expected value of the optimal strategy depends on a probability of interest: * select the probability cell of the other branch of the event set * enter the formula "=1-P" where P is a reference to the probability cell of interest * enter a list of probabilities in a column * select the cell in the row above the first probability in the column to the right * enter the formula "=R" where R is a reference to the rollback cell of the initial decision node * select the entire data table which includes the blank cell above the probability list... the cell with the formula referencing the rollback cell.Hints Hints: TreePlan and Excel 5 Hiding Selected Cells To hide all rollback EV/CE cells: * select one rollback EV/CE cell * from the Tools menu choose Decision Tree..