OCTOBER 30, 2016

DECISION TREE ASSIGNMENT

DR. ADEL SAKR | QUANTITATIVE ANALYSIS | 51-A

I - Step-1 The Decision Tree

Abandon Project
8

Manganese 1%
9

Gold 0.05 %
10
2
Silver 0.2 %
11
Nothing Found
12
Manganese 3%
13

Gold 2 %
Decision-1 Purchase-4 14
6
Enhance.
3 Silver 1 %
15
Nothing Found
16

Abandon Test
17

Manganese 0.75 %
18

Gold 0.04 %
19
7
Purchase-5 Silver 0.175 %
Reduce. 20
Nothing Found
21

Abandon Test
22
Step-2 Profit Calculation £
- If Abandon Project Path to Terminal node (8)  Zero Profit
- • Path to terminal node (9), purchase (cost £3m), explore (cost £1m) and
find manganese (revenue £30m)  Profit 26 (£m)
- • Path to terminal node (10), purchase (cost £3m), explore (cost £1m) and
find gold (revenue £250m), Profit 246 (£m)
- • Path to terminal node (11), purchase (cost £3m), explore (cost £1m) and
find silver (revenue £150m),  Profit 146 (£m)
- • Path to terminal node 12, purchase (cost £3m), explore (cost £1m) and find
nothing,  Profit -4 (£m)
- • Path to terminal node (13), we conduct the three-day test (cost £0.75m +
£0.25m), find we have an enhanced chance of significant metal deposits,
purchase and explore (cost £4m) and find manganese (revenue £30m), 
Profit 25 (£m)
- • Path to terminal node (14), we conduct the three-day test (cost £0.75m +
£0.25m), find we have an enhanced chance of significant metal deposits,
purchase and explore (cost £4m) and find gold (revenue £250m),  Profit
245 (£m)
- • Path to terminal node (15), we conduct the three-day test (cost £0.75m +
£0.25m), find we have an enhanced chance of significant metal deposits,
purchase and explore (cost £4m) and find silver (revenue £150m),  Profit
145 (£m)
- • Path to terminal node (16), we conduct the three-day test (cost £0.75m +
£0.25m), find we have an enhanced chance of significant metal deposits,
purchase and explore (cost £4m) and find nothing, total profit -5 (£m)
- • Path to terminal node (17), we conduct the three-day test (cost £0.75m +
£0.25m), find we have an enhanced chance of significant metal deposits,
decide to abandon,  Profit -1 (£m)
- • Path to terminal node (18), we conduct the three-day test (cost £0.75m +
£0.25m), find we have a reduced chance of significant metal deposits,
purchase and explore (cost £4m) and find manganese (revenue £30m), 
Profit 25 (£m)
- • Path to terminal node (19), we conduct the three-day test (cost £0.75m +
£0.25m), find we have a reduced chance of significant metal deposits,
purchase and explore (cost £4m) and find gold (revenue £250m),  Profit
245 (£m)

2
- • Path to terminal node (20), we conduct the three-day test (cost £0.75m +
£0.25m), find we have a reduced chance of significant metal deposits,
purchase and explore (cost £4m) and find silver (revenue £150m),  profit
145 (£m)
- • Path to terminal node (21), we conduct the three-day test (cost £0.75m +
£0.25m), find we have a reduced chance of significant metal deposits,
purchase and explore (cost £4m) and find nothing,  Profit -5 (£m)
- • Path to terminal node (22), we conduct the three-day test (cost £0.75m +
£0.25m), find we have a reduced chance of significant metal deposits,
decide to abandon,  Profit -1 (£m)

The total profit involved in each branch from the initial node to the terminal
node will be as follows:

Terminal Node # Total Profit £

8 0
9 26
10 246
11 146
12 -4
13 25
14 245
15 145
16 -5
17 -1
18 25
19 245
20 145
21 -5
22 -1

3
Step-3 Expected Monitory Value EMV Calculation:

•Consider chance node 7 with branches to terminal nodes

15-21 emanating from it. The expected monetary value for this
chance node is given by

•0.0075(25) + 0.0004(245) + 0.00175(145) + 0.99035(-5) = -

4.4125

•Hence the best decision at decision node (5) is to abandon

(EMV=-1).

•The EMV for chance node 6 is 0.03(25) + 0.02(245) + 0.01(145)

+ 0.94(-5) = 2.4

•Hence the best decision at decision node (4) is to purchase

(EMV=2.4).

•The EMV for chance node (3) is 0.5(2.4) + 0.5(-1) = 0.7

•The EMV for chance node 2 is 0.01(26) + 0.0005(246) +

0.002(146) + 0.9875(-4) = -3.275

•Hence at decision node 1 have three alternatives:

•abandon EMV=0

•purchase and explore EMV=-3.275

•3-day test EMV=0.7

•Hence the best decision is the 3-day test as it has the highest
EMV of 0.7 (£m) √

4
II – If another company offers to Pay Half of all costs:

In this case, the other company will share 50% of all Costs and
50% of all Revenues with (S & E), there for the same
calculated figures above will be exactly divided by 2 which
means that all the EMV decisions will be the same, however
the only benefit of sharing the costs and revenues is
distributing & sharing the risk too at 50% …

Therefor it is accepted to accept the offer from this company.

DECISION TREE ASSIGNMENT

DR. ADEL SAKR | QUANTITATIVE ANALYSIS | 51-A

Prepared By: Mohamed Ali Badr