INSTITUTE OF LEADERSHIP AND GOVERNANCE

DEPARTMENT OF PROJECT LEADERSHIP AND

MANAGEMENT

COURSE TITLE: - PROJECT RISKS AND DECISION ANALYSIS

Course Code (PLMT521)

INDIVIDUAL-ASSIGNMENT

By:

KENA BIZUNEH

ID No.ECSU_2202709

Section-1

Submitted To: Instructor Girma Tegene (Associate Prof.)

Submission Date: June/2023 G,C

Addis Ababa, Ethiopia

Individual Assignment for Project Risk and Decision Analysis
Q (1) Even though independent gasoline stations have been having a difficult time, Susan
Helms has been thinking about starting her own independent gasoline station. Susan’s
problem is to decide how large her station should be. The annual returns will depend on both
the size of her station and a number of marketing factors related to the oil industry and
demand for gasoline. After a careful analysis, Susan developed the following table:

For example, if Susan constructs a small station and the market is good, she will realize a profit of
$50,000.

a) Develop a decision table for this decision.

b) What is the maximax decision?

c) What is the maximin decision?

d) What is the equally likely decision?

e) Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.

Answer for question (A) – The decision table for the decision.

State of nature Row Row

Average
Alternatives Good Market Fair Market Poor Market maximum minimum
($) ($) ($)
Small (A1) 50,000 20,000 -10,000 50,000 -10,000 * 20,000
Medium (A2) 80,000 30,000 -20,000 80,000 -20,000 30,000
Large (A3) 100,000 30,000 -40,000 100,000 -40,000 30,000
Very large (A4) 300,000 25,000 -160,000 300,000 * -160,000 55,000*

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(B). What is the maximax decision?

State of nature Row maximum

Alternatives Good Market Fair Market Poor Market
($) ($) ($)
Small (A1) 50,000 20,000 -10,000 50,000
Medium (A2) 80,000 30,000 -20,000 80,000
Large (A3) 100,000 30,000 -40,000 100,000
Very large (A4) 300,000 25,000 -160,000 300,000*column maximum

Decision: Alternative very large (A4) Station will be chosen because alternative (A4 )very
large has the highest from the selected row maximum (The maximum of the maximum).

(C). What is the maximin decision?

State of nature Row minimum

Alternatives Good Market Fair Market Poor Market
($) ($) ($)
Small (A1) 50,000 20,000 -10,000 -10,000*column maximum
Medium (A2) 80,000 30,000 -20,000 -20,000
Large (A3) 100,000 30,000 -40,000 -40,000
Very large (A4) 300,000 25,000 -160,000 -160,000

Decision: Alternative Small size Station (A1) will be chosen because alternative (A1) Small
That Has the Best of the Worst (Minimum) from the selected row maximum.

(D). What is the equally likely decision?

For Small Station=$50,000 +$20,000 +(-$10,000) =$ 60,000/3 =$20,000

For Medium station= $80,000 +$30,000 +(-$20,000) =$ 90,000/3 =$30,000
For Large Station =$100,000 + $30,000 +(-$40,000) = $90,000/3 =$30,000
For very Large Station = $300,000 + $25,000 +(-$160,000) =$165,000/3 =$55,000* Maximum
Decision:-Alternative very large(A4) station will be chosen.

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 (E) Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.

50,000
FAIR 20,000
2 -10,000
_-10,000
80,0000

30,000
3 POOR
-20,000

100,000
Large
1 4 30,000

-40,000

300,000
5

25,000

-160,000
To calculate EMV Assume each outcome is equally likely, there fore:

EMV (node 2) = (50,000*0.33)+(20,000*0.33)+(-10,000*0.33)

= $19,800

EMV (node 3) = (80,000*0.33)+(30,000*0.33)+(-20,000*0.33)

= $29,700

EMV (node 4) = (100,000*0.33)+(30,000*0.33)+(-40,000*0.33)

= $29,700

EMV (node 5) = (300,000*0.33)+(25,000*0.33)+(-160,000*0.33)

= $54,450

Therefore the best decision would be constructs a very large station since it yields the largest expected
payoff $54,450 or node 5 has the highest EMV.

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 2. Julie Resler’s company is considering expansion of its current facility to meet increasing

demand. If demand is high in the future, a major expansion will result in an additional profit of

$800,000, but if demand is low there will be a loss of $500,000. If demand is high, a minor

expansion will result in an increase in profits of $200,000, but if demand is low, there will be a

loss of $100,000. The company has the option of not expanding. If there is a 50% chance

demand will be high, what should the company do to maximize long-run average profits?

Alternative Highest demand profit Low demand profit

Major expansion $800,000 -$500,000
Minor expansion $200,000 -$100,000
Probability 0.5 0.5

a) Construct a decision tree

$800,000 *0.5 = $400,000

Low demand $-500,000*0.5=250,000

2

$200,000*0.5=100,00

Minor expansion
1 3 Low demand
$-100,000*0.5=-50,000

b) Determine the best strategy using expected monetary value (EMV

EMV (node 2) = (0.5*$800,000) + (0.5*-$500,00) = $150,000

EMV (node 3) = (0.5*$200,000) + (0.5*-$100,000) = $50.000

Therefore the best decision would be to major expansion since it yields the largest expected
payoff $150,000 or node 2 has the highest EMV.

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3. Clay Whybark, a soft-drink vendor at Hard Rock Cafe’s annual Rockfest, created a table of

conditional values for the various alternatives (stocking decision) and states of nature (size of
crowd):If the probabilities associated with the states of nature are 0.3 for a big demand, 0.5 for an
average demand, and 0.2 for a small demand, determine the alternative that provides Clay Whybark
the greatest expected monetary value (EMV).

a) Construct a decision tree

Alternatives State of nature (Demand)

Big Average Small
Large stock (A1) $22,000 $12,000 $-2,000
Average stock (A2) $14,000 $10,000 $6,000
Small stock (A3) $9,000 $8,000 $4,000
Probability 0.3 0.5 0.2

$22,000*0.3=$6,600

$12,000*0.5=$6,000

2 -$2,000*0.2=-$400

$14,000*0.3=$4,200

$10,000*0.5=$5,000
3
$6,000*0.2=$1,200
1 $9,000*0.3=$2,700
AVERAGE 0.5
4 0.5 $8,000*0.5=$4,000
0

$4,000*0.2=$800

b) Determine the best strategy using expected monetary value (EMV)

EMV (node 2) = (0.3*$22,000) + (0.5*$12,000) + (0.2*-$2,000)

= $12,200

EMV (node 3) = (0.3*$14,000) + (0.5*$10,000)+ (0.2*$6,000)

= $10,400

EMV (node 4) = 0.3*$9,000) + (0.5*$8,000) + (0.2*$4,000)

= $7,500

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 EMV(node 1) = Max{ EMV(node 2),EMV(node 3),EMV(node 4)}

= Max { $12,200,$10,400,$7,500}

= $ 12,200
Therefore, the best decision alternative would be large stock since it yields the largest
expected payoff $ 12,200.or node 1 has the highest EMV.
4. Suppose you, as a manager of a company, have to either build new plant or upgrade the
existing plant. New plant costs 120 million dollar and upgrading requires investment costs
of 50 million dollar. Building new plant generates 200 million dollar and 90 million dollar
understrong and weak demand respectively. Similarly, upgrading existing plant provides
120million and 60 million dollar under strong and weak demand respectively. Assume that
the chance of strong demand is 0.6 and weak demand is 0.4.

Under such circumstance, which alternative decision do you choose based on EMV? Show
your analysis using decision tree.

Given

State of Nature(Demand)
Alternatives STRONG DEMAND($) WEAK DEMAND($)
(0.6) (0.4)
Build New Plant(A1) 200mil 90mil
Up-Grade the Existing Plant 120mil 60mil
(A2)

 Manager will Cost 120million to build new Plant.

 Manager Will Cost 50million to upgrade existing Plant.
 The chance of strong demand is 0.6 and weak demand is 0.4.

Required?
EMV and Decision Tree?
Solution
We need to calculate the expected return for each decision path and choose the one
with the highest expected return.
EMV of Build New Plant = ($80mil*0.6) + (-$30*0.4) = $48mil-$12mil= $36mil
EMV of Upgrading Existing Plant = ($70mil*0.6) + ($10mil*0.4) = $42mil+$4mil = $46mil
Maximum.

Decision: the alternative "Up-Grade existing plant " will be

chosen, as it has the highest expected return of $46mil.
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 STRONG DEMAND EMV= ($80mil*0.6) = $48mil

DECISION TREE
60%
STRONG Revenue=$200mil
DEMAND
EMV (BUILD NEW)
STRONG DEMAND PROFIT ($48mil+(-$12mil)=$
$200MIL-$120MIL=$80MIL

BUILD NEW
PLANT

WEAK DEMAND PROFIT COST=120mil

$90MIL-$120MIL=-$30MIL
WEAK DEMAND EMV= (-$30mil*0.4)= -$12mil

WEAK 40%
DEMAND Revenue=$90mil
ANSWER:
UP-GRADE PLANT
BUILD NEW
PLANT OR STRONG DEMAND EMV= ($70mil*0.6) = $42mil
UPGRADE PLANT
STRONG 60%
DEMAND Revenue=$120mil

EMV (UP-GRADE PLANT)

($42mil+$4mil)=$46mil

UPGRADE
PLANT

COST=50mil
WEAK DEMAND WEAK 40%
PROFIT DEMAND Revenue=$60mi
$60MIL-$50=$10MIL
WEAK DEMAND EMV= ($10mil*0.4) = $4mil