Decision Trees using Excel
Not what you're looking for?
Decision Trees
Scenario: You are a consultant who works for the Excellent Consulting Group. You have learned about three different investment opportunities and need to decide which one is most lucrative. Following are the three investment options and their probabilities:
Option A: Real Estate development. This is a risky opportunity with the possibility of a high payoff, but also with no payoff at all. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the cash payoff and probabilities:
Required initial investment: $0.75 million
High NPV: $5 million, Pr = 0.5
Medium NPV: $2 million, Pr = 0.3
Low NPV: $0, Pr = 0.2
Option B: Retail franchise for Just Hats, a boutique-type store selling fashion hats for men and women. This also is a risky opportunity but less so than Option A. It has the potential for less risk of failure, but also a lower payoff. You have reviewed all of the possible data for the outcomes in the next 10 years and these are your estimates of the payoffs and probabilities:
Required initial investment: $0.55 million
High NPV: $3 million, Pr = 0.75
Medium NPV: $2 million, Pr = 0.15
Low NPV: $1 million, Pr = 0.1
Option C: High Yield Municipal Bonds. This option has low risk and is assumed to be a Certainty. So there is only one outcome with probability of 1.0:
Required initial investment: $0.75 million
NPV: $1.5 million, Pr = 1.0
Assignment
Develop an analysis of these three investments, and determine which of them you should choose. Be sure to account for cash paid for each of the three alternatives. If you do not recall how to do this, review the practice exercises in the Background page. Do your analysis in Excel using the Decision Tree add-in.
Write a report to your private investment company and explain your analysis and your recommendations. Provide a rationale for your decision.
SLP Assignment Expectations
Analysis
• Accurate and complete Excel analysis.
Written Report
• Provide a brief introduction to/background of the problem.
• Written analysis that supports Excel analysis and provides thorough discussion of assumptions, rationale, and logic used.
• Complete, meaningful, and accurate recommendation(s).
Purchase this Solution
Solution Summary
An Excel file with the decision tree is provided. A Word file with the report is provided.
Solution Preview
The instructions say to use SimpleDecisionTree_V1.4.xla
The new file you attached is called SimpleDecisionTree_V1.4.xls
Note that both the old and the new ...
Education
- MSc, California State Polytechnic University, Pomona
- MBA, University of California, Riverside
- BSc, California State Polytechnic University, Pomona
- BSc, California State Polytechnic University, Pomona
Recent Feedback
- "Excellent work. Well explained."
- "Can you kindly take a look at 647530 and 647531. Thanks"
- "Thank you so very much. This is very well done and presented. I certainly appreciate your hard work. I am a novice at statistics and it is nice to know there are those out there who really do understand. Thanks again for an excellent posting. SPJ"
- "GREAT JOB!!!"
- "Hello, thank you for your answer for my probability question. However, I think you interpreted the second and third question differently than was meant, as the assumption still stands that a person still independently ranks the n options first. The probability I am after is the probability that this independently determined ranking then is equal to one of the p fixed rankings. Similarly for the third question, where the x people choose their ranking independently, and then I want the probability that for x people this is equal to one particular ranking. I was wondering if you could help me with this. "
Purchase this Solution
Free BrainMass Quizzes
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.