Consolidate, Reap Without Investing 0. 6 $6,000 $400 $6,400 B. How The Determination was Reached The dollar outcomes and probabilities that make up the contingency table are subjected to decision tree analysis so as to visualize all probable results. In the first place, the four alternative outcomes are made to form the main branches, or nodes, of the decision tree. Then the conditional probabilities for each node are calculated.
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We can take Outcome Node #1 as an example. Firstly, we input the probabilities of 0. 4, 0. 4 and 0. 2 for “good”, “moderate” and “poor” market reception. We then proceed to develop the marginal, conditional, and Joint probabilities for each terminal end- point. The formula for the conditional probability of events A and B is changed as: By developing the likely revenue of market response outcome and summing the results, we obtain the expected value of the node. Comparing across all nodes, we can assess the uncertainty-adjusted outcomes of each course of action.See More on Probability