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    Decision Tree Analysis

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    Tom is suing the manufacturer of his car for $3.5 million because of a defect that he believes caused him to have an accident. If Tom decides not to sue the manufacturer, the manufacturer would offer him a settlement of $600,000. If Tom decides to proceed with the lawsuit, his attorney has advised him that he has 50% chance of winning his case. If he loses, he will incur attorney's fees of $75,000. If Tom wins, his attorney believes that there is an 80% chance he could receive the full settlement, in which case Tom would realize a $2 million after his attorney takes her cut, and a 20% chance that the jury will award him a lesser amount of $1 million, of which Tom would get $500,000. Using a decision tree, decide if Tom should proceed with his lawsuit against the manufacturer.

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    Solution Preview

    Please see the attached file.

    We make a decision tree as below

    There is a 80% possibility of getting a settlement of $2,000,000 and a 20% possibility of ...

    Solution Summary

    The solution explains how to carry out a decision tree analysis.

    $2.19

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