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Unit 4: Data Mining Classification

estimate that the probability of these bids being accepted (once they have been short-listed) is notes
0.90, 0.75 and 0.35 respectively.
What should the company do and what is the expected monetary value of your suggested course
of action?
Solution

The decision tree for the problem is shown in Figure 4.5:
figure 4.5: Decision tree

Below we carry out step 1 of the decision tree solution procedure which (for this example)
involves working out the total profit for each of the paths from the initial node to the terminal
node (all figures in £’000).
1. Path to terminal node 7 – the company do nothing
Total profit = 0
2. Path to terminal node 8 – the company prepare the bid but fail to make the short-list
Total cost = 10 Total profit = –10
3. Path to terminal node 9 – the company prepare the bid, make the short-list and their bid of
£155K is accepted
Total cost = 10 + 5 + 127 Total revenue = 155 Total profit = 13
4. Path to terminal node 10 – the company prepare the bid, make the short-list but their bid of
£155K is unsuccessful
Total cost = 10 + 5 Total profit = –15
5. Path to terminal node 11 – the company prepare the bid, make the short-list and their bid
of £170K is accepted
Total cost = 10 + 5 + 127 Total revenue = 170 Total profit = 28

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