Name: Sarah Gywneth T.

Sarmiento Management Science

Mr. Rene Argenal
Assignment # 5: Decision Tree
a. Verify Dante’s profit projections shown at the ending branches of the decision tree by calculating
the payoffs of $2,650,000 and $650,000 for the first two incomes.
For the 1st outcome: For the 2nd outcome:
Bid: 200,000 Bid: 200,000
Win Contract: 2,000,000 Win Contract: 2,000,000
Market Research: 150,000 Market Research: 150,000
High Demand: 5,000,000 High Demand: 3,000,000
=5,000,000- =3,000,000-
(200,000+2,000,000+150,000) (200,000+2,000,000+150,000)
=$2,650,000 =$650,000

b. What is the type of optimal decision strategy for Dante, and what is the expected profit for this
project?
Expected Value at nodes:
2: 0.8 (2000) + 0.2 (200) = 1,560
4: 0.6 (2350) + 0.4 (1150) = 1,870
8: 0.85 (2650) + 0.775 (650) = 2,350
9: 0.225 (2650) + 0.775 (650) = 1,100
10: 0.60 (2800) + 0.4 (800) = 2,000

c. What would the cost of the market research study have to be before Dante would change its
decision about the market research study?
Cost would have to decrease from at least $130,000

d. Develop a risk profile for Dante.

Strategies Payoff Probability
Bid, Lose Contract -200 0.20
Win Contract, build complex, 800 0.32
no market research (moderate
demand)
Win Contract, build complex, 2,800 0.48
no market research (high
demand)