Why a Decision Tree

• A decision tree can be used as a model for a sequenGal decision problems under uncertainty

• A decision tree describes graphically the decisions to be made, the events that may occur, and the outcomes associated with combinaGons of decisions and events

• ProbabiliGes are assigned to the events, and values are determined for each outcome

• A major goal of the analysis is to determine the best decisions

• Decision tree models include such concepts as nodes, branches, terminal values, strategy, payo distribuGon, certain equivalent, and the rollback method

• TreePlan is a decision tree add-in for MicrosoQ Excel 2003-2013 (Windows) and MicrosoQ Excel 2011 (Macintosh)

• TreePlan helps you build a decision tree diagram in an Excel worksheet using dialog boxes.

• Decision trees are useful for analysing sequenGal decision problems under uncertainty.

Decision Tree

• Your decision tree model may include various controllable alternatives

- whether to introduce a new product
- whether to bid on a new project
• and uncontrollable uncertainties
- possible demand for a product
- whether you're awarded a contract
• TreePlan is set to automatically calculate rollback values for determining the optimal strategy

Decision Tree

DriveTek Problem

• DriveTek Research Institute considering offering a potential client the development of a new storage device for a proposed new computer system.

• Since the client (a computer company) does not have research people available to develop the new storage device, it will subcontract the development to an independent research firm.

• The computer company has offered a fee of $250,000 for the best proposal for developing the new storage device.

• The contract will go to the firm with the best technical plan and the highest reputation for technical competence.

DriveTek wants to enter the competition

• Management estimates a cost of $50,000 to prepare a proposal with a fifty-fifty chance of winning the contract

• However, DriveTek‘s engineers are not sure about how they will develop the storage device if they are awarded the contract.

• DriveTek Research can work on only one approach at a Gme and has Gme to try only two approaches

• If it tries either the magnetic or electronic method and the a"empt fails, the second choice must be the mechanical method to guarantee a successful model

• The management of DriveTek Research needs help in incorporaGng this informaGon into a decision to proceed or not STEP-BY-STEP TREEPLAN TUTORIAL

• Decision trees have three kinds of nodes and two kinds of branches.

- A decision node is a point where a choice must be made; it is shown as a square

• The branches extending from a decision node are decision branches, each branch represenGng one of the possible alternaGves or courses of acGon available at that point

• The set of alternaGves must be mutually exclusive (if one is chosen, the others can not be chosen) and collectively exhaustive (all possible alternaGves must be included in the set)

Nodes and Branches

• There are two major decisions in the DriveTek problem

1. First, the company must decide whether or not to prepare a proposal

2. Second, if it prepares a proposal and is awarded the contract, it must decide which of the three approaches to try to saGsfy the contract

INSTALLATION OVERVIEW

TreePlan, SimVoi, and SensIt are decision analysis add-ins for Microsoft Excel 2007-2013 (Windows) and Microsoft Excel 2011 (Macintosh).

In general, an Excel add-in is software that adds features to Excel. TreePlan helps you build decision tree diagrams. SimVoi provides random number generator functions for model inputs, automates Monte Carlo simulation, and creates Excel charts for a histogram and the cumulative distribution of each output variable. SensIt performs sensitivity analysis on your worksheet what-if model and automatically creates simple plots, spider charts, and tornado charts. These instructions are appropriate for installing each of these products.

For each add-in, all of the functionality, including its built-in help, is a part of the single file in XLAM format. There is no separate help file. On a Windows computer, the installation does not create Windows Registry entries, although Excel may use such entries to keep track of its add-ins.

Before you open or install an add-in, you must remove any previous versions of the add-in. Excel will not work correctly if you try to use two versions of the same add-in simultaneously. For example, if you were using a trial version and now you want to use the standard version, Excel will regard this as two versions of the same add-in. The same applies to moving from an older to a newer version, such as from SensIt 1.31 to SensIt 1.46.

If you were using the previous version by "opening" the add-in file, then all you need to do is not open that previous version. Instead, "open" the new version of the add-in.

But, if you had "installed" the previous version, then you must "uninstall" the old version before using the new version. For instructions, refer to the appropriate Uninstalling subsection at the end of each of the Installing sections.

TREEPLAN OVERVIEW

TreePlan is a decision tree add-in for Microsoft Excel 2007-2013 (Windows) and Microsoft Excel 2011 (Macintosh).

TreePlan helps you build a decision tree diagram in an Excel worksheet using dialog boxes. Decision trees are useful for analyzing sequential decision problems under uncertainty. Your decision tree model may include various controllable alternatives (e.g., whether to introduce a new product, whether to bid on a new project) and uncontrollable uncertainties (e.g., possible demand for a product, whether you're awarded a contract), arranged in chronological order. TreePlan automatically includes formulas for summing cash flows to obtain outcome values and for calculating rollback values for determining the optimal strategy.

To use TreePlan, you

(1) open a new worksheet,

(2) press Ctrl+Shift+T (or Option+Cmd+T) to build a new decision tree diagram,

(3) select a node to change the structure of your decision tree,

(4) enter branch names, cash flows, and probabilities, and

(5) determine the optimal strategy from TreePlan's results.

All of TreePlan's functionality, including its built-in help, is a part of the TreePlan XLAM file. There is no separate setup file or help file. When you use TreePlan on a Windows computer, it does not create any Windows Registry entries (although Excel may use such entries to keep track of its add-ins).

DriveTek Problem

DriveTek Research Institute discovers that a computer company wants a new storage device for a proposed new computer system. Since the computer company does not have research people available to develop the new storage device, it will subcontract the development to an independent research firm. The computer company has offered a fee of $250,000 for the best proposal for developing the new storage device. The contract will go to the firm with the best technical plan and the highest reputation for technical competence.

DriveTek Research Institute wants to enter the competition. Management estimates a cost of $50,000 to prepare a proposal with a fifty-fifty chance of winning the contract.

However, DriveTek's engineers are not sure about how they will develop the storage device if they are awarded the contract. Three alternative approaches can be tried. The first approach is a mechanical method with a cost of $120,000, and the engineers are certain they can develop a successful model with this approach. A second approach involves electronic components. The engineers estimate that the electronic approach will cost only $50,000 to develop a model of the storage device, but with only a 50 percent chance of satisfactory results. A third approach uses magnetic components; this costs $80,000, with a 70 percent chance of success.

DriveTek Research can work on only one approach at a time and has time to try only two approaches. If it tries either the magnetic or electronic method and the attempt fails, the second choice must be the mechanical method to guarantee a successful model.

The management of DriveTek Research needs help in incorporating this information into a decision to proceed or not.

Attachment:- Assignment.rar