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Hi John
Can you let me know if this is correct for the solution to the decision Trees question?
A
High 20000 x 0.6 = 12000
Low (5000-5000+7500)x 0.4=3000
Less initial costs (10000)
=5000B
High 40000x.6=24000
Low 10000x.4=4000
Less initial costs (15000)
=13000Decision: invest in B
ah that’s great I have no practice on these so I was afraid I would get the method wrong , thanks
For A, Low, are there not 2 options, to invest or not to invest (with scrap value of $1000) or do we simply use the higher of these 2 options at the decision point?
There are two options, but because it is our choice we choose the better of the two (i.e. to invest rather than scrap)
Would it have been possible to neither invest or scrap, that would have given low a total revenue of 10000 over the 10 years (before adjusting for expected values) ? Or if that was an option would they have cleary stated it?
No – the question does make it clear what revenue will be if we decide not to scrap, and the only choice is to either scrap or continue – the decision has to be made.
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