decision trees exercise 2

8/4/2019 Decision Trees Exercise 2

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InternationalHellenicUniversity

ParaskevopoulosKonstantinos

1

E x e r c i s e DecisionTrees

2InthisExerciseBuildaDecisionTreeDecisionnodesEventnodesEndnodesCalculateexpectedvalues

Duration:60minutes

DecisionScenarioMr.KeramidastheVicePresidentofNiceCeramicsA.E.callsyouinhisofficetogiveyousomeextra

informationaboutthedecisionscenarioyouwereworkingwithinExercise1.

HereportsthatNiceCeramicsBusinessAnalysisdepartmenthaslearnedsomemoreinformationthat

mayaltertheanalysisreportthatyoumadeinExercise1.Mr.Keramidastellsyouthattheproposed

Supertileproductmustfirstpasssometeststotakesome ISOcertificationforeitherresidentialor

commercial use, before it can be sold in the market whereas those tests are not necessary for

Saviortileproduct.Mr.KeramidasdescribesyouhowISOcertificationprocessworks:

The rules for obtaining the commercial usage ISO certification are very strict, so thelikelihoodofobtainingthatcertification isonly30%.However ifcommercialcertification is

obtained,thiswillresultin900.000asexpectedoriginally.

Obtainingan ISOcertificationforresidentialusageoftheproduct is lessstrict,thus is60%likelytoobtain.Theexpectedsalesareconsiderablylowerastheestimatepredictsnomore

than300.000sales.

There isalsoasmallchanceof10%that thesmokedetectorwillnotpassanycertificationtest, so the result will be a total failure and NiceCeramics will lose the initial 90.000

investmentcost.

The company that will supply the product with the certification charges a 6.000 nonrefundablefeefortheprocedure.

YouhavetomakeanewreporttoMr.Keramidasbearinginmindallthatnew information. Todo

thatyouneedtoalteryourinitialdecisiontreealittlebitandthentoreevaluateitsoitwillreflect

allthisnewinformation.


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DecisionTrees

SolutionusingDETRETUsoftwareAddasequentialdecisionOpen

the

file

where

you

saved

the

decision

tree

of

Exercise

1.

The

event

node

for

the

successful

developmentofSaviortileproductandtheNeithernodewillremainunchanged. Whatwillneedto

change istheeventnodeforthesuccessfuldevelopmentofSupertile,as itcannow leadtoanew

decision node followed by some event nodes to depict all the procedure of obtaining the ISO

certification. Do the following steps in DETRETU to change the decision tree due to the new

information:

1. Clickonthetrianglesymbol attherightsideofthenodeSuccessoftheproductSupertile.ThiswillopenthedialogframeInsertNewBranch.

InternationalHellenicUniversity 2

whichisnowtransformedintoaDecisionNodeasshowninFigure1.

NotethatSuccessnodenowoffersnorevenuetothecompanysothevalue900.000shouldbe

replacedby0.

. ChangethenameofthetopnewnodetoTestsandthebottomnewnodetoNoTests.

. Typethevalue 6000atnodeTestsasthisisthepricethatNiceCeramicshastopaytoproceedwiththecertificationtests.YourtreeshouldnowlookliketheoneshowninFigure2.

2. Select the graphicDecisionNode and clickOK. Two new nodes will be inserted after the endnodeSuccess

Figure1

3

4



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DecisionTrees


5. Clic onthetrianglesymbollocatedattherightsideofnodeTestssotheframedialogInsertNewBranchopens.

6. InInsertNewBranchdialog,selectthegraphicEventNodeandclickOK.Twonewnodeswillbeinserted after the end nodeTests which is now transformed into anEventNode as shown in

Figure3.

7. Changethenameofthetopnewnodeto (CommercialISOcertificate)andthenameofthe ottomnewnodetoResISO(ResidentialISOcertificate).

wnodetoNoISO.ThealteredSuccessbranchafterthecompletionofthisstepshouldlookliketheoneshowninFigure4.

Figure2

k

Figure3

ComISOb

8. Clickonthecirclesymbol attherightofTestsnodeto insertanewEventnode.Changethenameofthisne



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NoISOtype10(for10%chance).

10. Insert thevalue900000 inCom ISO node as thosewillbe thesales ifCommercialcertificationsucceeds.InnodeResidentialISO,insertthevalue300000asthosewillbethesalesifresidential

certificationsucceeds.YourDecisionTreeshouldnowlookliketheoneshowninFigure6.

This asshown inFigure6,offersagoodexampleofsequentialdecision.Therootdecision

leadstoatleastotherdecisiononsomebranchpath.Theseconddecisionleadstofurtherevent

Figure49. ChangethechancesofeachoneoftheoutcomenodesofnodeTests. InCom ISO,type30(for

30%chance),inResISOtype60(for60%chance)andfornode

TheTestsbranchshouldnowlooklikethefollowingFigure5.

tree

Figure5

nodes.Youcanaddmoredecisionnodestorepresenthowtheymustoccurintimeonabranch

path.Adecisiontreeiscapabletokeeptrackofmanysequentialdecisions.



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Figure6

5


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SolvethetreeAfter completing all the above steps your decision tree now depicts the new information Mr.

Keramidasgaveyouaboutthetwoprojects.Nowitstimetosolvethetreeandmakethefinalreport

thatyouwillgivetohim.Dothefollowingsteps.

InDETETRUClickmenuTree>Solve.ThesolvedtreeasresultsinDETRETUisshowninFigure7.

ThetreeissolvedusingallthestepsdescribedinExercise1.TheSaviortilehasbecomenowthebest

choiceforNiceCeramics.Thenewinformationenteredinthetree,dramaticallyreducestheEMVfor

Supertile.ThemainreasonforthelowerEMVisdescribedbelow.

Obtainingarevenueofabout900.000 isstillpossiblewithacommercial ISOcertification,butthis

outcome has a low chance to come true (only 30%). A smaller revenue of 300.000 with a 60%

chance isstillpossiblewitharesidential ISOcertification,butthis isnotgoodenoughtooffsetthe

resulting lower EMV at this node. Since you must use this EMV as the input for the development

outcomechancenodetheoverallEMVofSupertilefallsbelowthatofSaviortile.

Figure7



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7

ereducedEMVofSupertile istherelativelymodestprobabilityofobtaining

the optimal commercial ISO certification. This lowered probability multiplied by the anticipated

revenuesignificantly lowerstheoverallEMV forthatbranch.Even if theprobabilityofobtaininga

commercial ISO certification is increased to 50% the resulting EMV is still less than that for the

Saviortile.

YoucansummarizeyoureporttoMr.Keramidasasfollows.

TheSupertileproductisnowsignificantlymoreriskyasgreateruncertaintyexists. TheSupertileproductprofitsareless,especiallyinthecaseofnotobtainingacommercialISO

certification.

This combination of greater risk potentially fewer profits, significantly reduces theattractivenessoftheSupertileproduct.

Themainreasonforth

decision trees exercise 2

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