Page 297 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes
Table 14.2: Probabilities and PVs of Projected Cash Inflows
Products Initial Investment PV of Cash Probabilities
Inflows
A $ 225,000 1.00
$ 450,000 0.40
200,000 0.50
–100,000 0.10
B 80,000 1.00
320,000 0.20
100,000 0.60
–150,000 0.20

Solution:
The decision tree analyzing the two products follows:

Decision Tree

Hence based on the expected net present value, the company should choose product A over
product B.

Did u know? The most widely used criterion for evaluating various courses of action under
risk is the Expected Monetary Value (EMV) or Expected Value. EMV is the weighted sum
of possible payoffs for each alternative.

292 LOVELY PROFESSIONAL UNIVERSITY