Posted: May 9th, 2022
ABC Company is considering to select one of the 3 projects based on the risk (probability p) and costs:
1. Project 1:
a.no modifications: p=.6, $400,000
b.slight modifications: p=.4, $500,000.
2. Project 2:
a.Complex, p=.4, $600,000
b.Simple, p =.6,
•with some revisions p=.7, $400,000
• with no revisions, p.=.3, $300,000
3. Project 3:
a.Complex, p=.5, $400,000
b.Simple, p=.5, $600,000
Draw the EMV tree to compute EMV for each option. Which option should be selected (the lowest cost)?
Hint: Use Decision Trees and Expected Monetary Value (EMV) in PPT Slide 39 to compute the costs.
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