excel and precision tree

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excel and precision tree

excel and precision tree
DS631 W23 HW1 Page 1 DS 631 : Decision Analysis Winter 2023 Homework Assignment 1 Team : ___________________________ Due: 2/14/2023 11:59 PM Total Points: 100 Instruction Please upload your materials no later than the due date and time. Have a single Word file with written explanations for every attempted problem and Excel spreadsheets as supplemental materials with problem number s clearly stated in the file name. Use the ” Assignment” link of the menu on the left panel in the Canvas system. Problem 1 (25 points): You consider repurposing an existing product for a new market. The initial conversion cost is $20,500. The expected a nnual cash flows should be $5,000 annually for six years . However, you expect that they will vary between $4,000 and $6,000. Cash flow occurs at the end of each year , and the cost of capital (interest rate) is 11%. But you also estimate that it could be as low as 8 % and as high as 18% , depending on the overall economy. You want to decide based on whether the project has a positive net present value (NPV). a. Assuming that the cost of capital is fixed at 1 1% but that the annual cash flows could vary for the se six years , construct a tornado diagram to show the impact of each year ‘s cash flow on NPV. b. Assuming that these annual cash flow s vary but are consistent across all these six years, construct a strategic region chart using the two -way sensitivity analysis with the interest rate on x axle and the fixed annual cash flow on y axle. Interpret how the cash flows and the interest rate affect your decision. Problem 2 (10 points): Luffy , a graduating senior in business analytics, is preparing for an interview with a firm. Before the interview, he sets his chances of getting an offer at 70%. Then, on examining his seniors who had interviewed and gotten offers from this firm, he learn ed th at of the people who rec eived offers, 92% said that they had good interviews. On the other hand, of those who did not receive offers, only 62% said they had good interviews. So what is the probability that a seminar received an offer when he/she had a bad interview? In addition, what is the probability that Luffy assumed to have a good interview? What is the probability that Luffy has a good interview and receives an offer? Further, i f Luffy has a good interview, what is his chance of receiving an offer? And if Luff ha s a bad interview, what will be the change? Problem 3 (15 points): Recall your decision to find a n apartment or buy a house. Retrospectively, w hat were your fundamental objectives [3 objectives in 2 levels at least]? What were your means objectives [4 at least]? Elaborate on these objectives properly. Create a fundamental -objectives hierarchy, a mean objective network, and link them together. DS631 W23 HW1 Page 2 Problem 4 (20 points): A consulting firm, Omega Consulting, is considering offering a data analysis service. If the demand is high (i.e., there is a favorable market for the service), the firm could realize a net profit of $ 80,000. If the market is not favorable, they could lose $35,000. Also, they do not have to proceed , in which case there is no cost. In the absence of any market data, the firm’s best guess is that there is a 70- 30 chance of high demand. a. Create an influence diagram using PrecisionTree. What are the expected value and the standard deviation? b. Use the influence diagram you just built and convert it to a decision tree. Explain the optimal decision . c. Modify the influence diagram if the firm consider s conducting a market survey. Problem 5 (1 0 points): Solve the tree in the figure below either using PrecisionTree or manually. Identify the EMVs of each chance node and find the best option. Values outside of parenthesis are costs or returns, and values in parenthesis are the probabilities. Problem 6 (2 0 points): Back to Al lison Tate’s decision in the HBR case. Now you are the newly hired analyst , and Tate would like to examine her decision’s sensitivity. a. Suppose she wants to examine the impact of sales when the market (and research) is favorable on EMV. Can you enhance the model you built earlier in Preci sionTree to conduct a one -way sensitivity analysis for the range from 350 to 950 (currently, 800) and describe what you find? b. She also wants to know whether her decision is sensitive to the chance of the market (and research) being favorable (currently, it is estimated at 40%) . In other words, should she change her decision if the chance is extremely high or low (e.g., 20% or 90%) ? Again, use sensitivity analysis to find this out for her. 1 3 2 8 (0.8 5) 11 (0.3) Opt 1 Opt 2 -2 (0. 15 ) 6 (0. 45 ) 6 (0. 3) 14 (0. 7) -2 -3 5 (0.25)

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