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ECE 201 Unit 4 Decision Analysis - Part1
ECE 201 Unit 4 Decision Analysis - Part1
4 DECISION ANALYSIS
LESSONS COVERED
DURATION
12 hours
INTRODUCTION
OBJECTIVES / COMPETENCIES
1. List possible actions or events using pay-off table and decision tree.
2. Differentiate the different modelling techniques used under the conditions of
certainty, risk and uncertainty.
3. Identify mutually exclusive and independent projects; define revenue and cost
alternatives.
PRETEST
1. What is a method of determining when the value of one alternative becomes equal
to the value of another?
A. Specific identification method
B. Average cost method
C. Break-even analysis
D. Incremental value method
2. What is defined as the length of time usually in years, for cumulative net annual
profit to equal the initial investment?
A. Return of investment period
B. Turnover period
C. Break-even period
D. Payback period
5. What is defined as the reduction or fall of the value of an asset due to constant
use and passage of time?
A. Depletion
B. Inflation
C. Depreciation
D. Deflation
Course of action:
The decision taken by the decision maker is called a course of action.
State of nature:
Future events that are beyond the control of the decision maker are called
state of nature.
Pay-off:
A pay-off is an outcome, expressed in numerical values, that results from
each possible combination of alternatives and states of nature.
Under Certainty
Under Risk
It is assumed that the decision maker has sufficient information about the
states of nature.
He can easily list the various states of nature and can also assign probabilities
to their occurrence.
The decision maker may use the past experience or may use subjective
judgment in assigning probabilities.
The most commonly used criterion is the criterion of expected value or the
Baye’s criterion.
Example Problem
A retailer purchases a particular product at the rate of P200 per kg daily and sells it
at the rate of P250 per kg. The unsold product at the end of the day can be disposed
off the next day at the salvage value of P170 per kg. Past sales have ranged from 25
to 28 kg per day. The table shows the sales record for the past 100 days.
Determine the quantity of the product in kg which the retailer should purchase to
optimize the profit.
Perfect Information would tell us with certainty which outcome is going to occur
Having perfect information before making a decision would allow choosing the
best payoff for the outcome
UNIT 4
Post Test (Part 1)
REFERENCES
Blank, L., & Tarquin, A., (2018). Engineering Economy (8th edition). New York, NY:
McGraw-Hill Education
Khan, Z., Siddiquee, A., Kumar, B., & Abidi, M., (2018). Principles of Engineering
Economics with Applications (2nd edition). New York, NY: Cambridge
University Press
Sullivan, W., Wicks, E. & Koelling, C. (2015). Engineering Economy (16th edition).
Upper Saddle River, NJ: Pearson Higher Education, Inc.