Question

Your team is trying to decide which project to pursue, Project 1, Project 2 or Project 3 described below. Using the Decision Tree and EMV technique: Draw Decision Trees and Calculate EMVs for all the projects. Identify which project has the potential to be the most profitable? What would your team do if your team were very risk averse? (You MUST SHOW all of your work to receive credit)

Project 1:

10% probability of winning the contract with potential gain of $100,000 25% probability of winning the contract with potential gain of $30,000 65% probability of losing the contract with potential loss of $10,000

Project 2:

20% probability of winning the contract with potential gain of $150,000 40% probability of losing the contract with potential loss of $30,000 25% probability of losing the contract with potential loss of $16,000 10% probability of losing the contract with potential loss of $10,000 5% probability of losing the contract with potential loss of $25,000

Project 3:

70% probability of winning the contract with potential gain of $20,000 15% probability of winning the contract with potential gain of $10,000 10% probability of winning the contract with potential gain of $5,000 5% probability of losing the contract with potential loss of $100,000

Answer 1

Based on the provided information, let's calculate the Expected Monetary Value (EMV) for each project.

Project 1 EMV: (0.10 * $100,000) + (0.25 * $30,000) + (0.65 * -$10,000) = $10,000

Project 2 EMV: (0.20 * $150,000) + (0.40 * -$30,000) + (0.25 * -$16,000) + (0.10 * -$10,000) + (0.05 * -$25,000) = $18,000

Project 3 EMV: (0.70 * $20,000) + (0.15 * $10,000) + (0.10 * $5,000) + (0.05 * -$100,000) = $16,000

Based on the EMVs, Project 2 has the potential to be the most profitable with an EMV of $18,000.

If our team were very risk averse, we would prioritize minimizing potential losses. In this case, Project 1 would be the best choice as it has the lowest potential loss of -$10,000.