Page 293 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes In the example in Figure 14.3, the value for ‘new product, thorough development’ is:
0.4 (probability good outcome) x $1,000,000 (value) = $400,000
0.4 (probability moderate outcome) x $50,000 (value) = $20,000
0.2 (probability poor outcome) x $2,000 (value) = $400

+ $420,400
Figure 14.4 shows the calculation of uncertain outcome nodes:
Figure 14.4

Note that the values calculated for each node are shown in the boxes.
Calculating the Value of Decision Nodes

When you are evaluating a decision node, write down the cost of each option along each decision
line. Then subtract the cost from the outcome value that you have already calculated. This will
give you a value that represents the benefit of that decision.

Note that amounts already spent do not count for this analysis – these are ‘sunk costs’ and
(despite emotional counter-arguments) should not be factored into the decision.

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