Question

Decision trees are used to graphically depict a decision making situation. Propose a business decision in which you intend to use Expected Monetary Value (EMV) as your decision making technique. Describe how you would determine the best decision using the EMV criterion with a decision tree.(If you have no experience with this type thing, then try to imagine a situation in which EMV and Decision Trees could be used and propose an example) In all discussion question responses ensure that you correctly reference sources you used in researching and analyzing your response. Use appropriate scholarly citation methods.

Answer 1

Decision trees and Expected Monetary Value are used together to get the best decision. In a business situation, a company is likely to face two or more risky situations. In each of these situations there will either be a cost or a benefit associated. The decision tree is a diagramatic representation of the risky options and the calculation of the Expected Market Value. The option with the higher Expected Market Value will be selected by the company or the option with the least cost. Expected Market Value is calculated by multiplying the probability of the occurence of the risk with the impact of the risk in monetary terms.

Example:

A Project manager has identified that the current technology used by the company is getting outdated and it is increasing the time of producing the finished product. It can either upgrade the technology or buy new technology. But in both the cases there is a certain amount of risk involved. In case of upgrading technology the probability of risk is 20% and the cost involved is 100,000 USD. In case of buying new technology the risk probability is 15% and the cost involved is 200,000 USD.

In the given situation, the decision tree and Expected Monetary Value will be as follows:

Since there is a cost involved in both the options, so the Expected Monetary Value is negative. Between the two options, upgrading the technology will cost $20,000 while buying new technology will cost $30,000. Thus, upgrading the technology is a better decision.