W8_Austin_Project Evaluation using Decision Tree Probability Technique

[Solving Engineering Economy Problem, Chapter 12, PP500 – 572].

1.   Problem recognition, definition and evaluation

Project evaluation using decision tree probability provides an effective method of Decision Making. It is an excellent tool that helps us choose between several alternatives and range of possible outcomes. Hence, problem statement is to determine which analysis results favor approval of the project and which ones appear unfavorable.

2.   Development of the feasible alternatives

4. Selection of the acceptable criteria

In this analysis the uncertain cash flows for a small improvement project as described by the probability tree diagram above is based on the following premise:

1.   The analysis period is two years and The MARR (Minimum Attractive Rate of Return) = 12%.

2.   Estimated probabilities of each outcome must add up to 1 if fractions and if percentages come up to 100% at each circle.

When we have calculated these decision benefits, choose the option that has the largest benefit, and take that as the decision made. This is the value of that decision node.

 5. Analysis and Comparison of the alternatives

6.   Selection of the preferred alternative

The analysis results that favor approval of the project are E(PW) = $39.43

which is greater than zero only by a small amount, and Pr[PW > 0] = 1 - 0.26 = 0.74

The SD(PW) =  $116.93, however, is approximately three times the E(PW).

This indicates therefore that the project is economically attractive and has low risk of failing to add value to the firm objective. 6.   Performance Monitoring and Post Evaluation of Results With monitoring and evaluation of the range of possible outcomes of our decisions, we can now determine which option has the greatest worth to the firm. Starting by assigning a cash value or score to each possible outcome and estimate how much we think it would be worth to us if our accepted outcome becomes feasible. References/Bibliography 1.   Gilbert, G.S. Decision Tree Analysis - Decision Trees from MindTools.com This article explains how to use Decision Tree Analysis to choose between several courses of action. Retrieved from: www.mindtools.com 2.   Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15th ed.), Chapter 12 PP 500 - 572. Retrieved from: http://www.amazon.com/Engineering-Economy-15th-William-Sullivan/dp/0132554909 3.   The Advance Project Management Memory Jogger, A Pocket Guild for Experienced Project Professionals. Retrieved from: http://www.goalqpc.com/shop_products_detail.cfm?PID=710 4.   Giammalvo, P.D (2012, October 22). Day 2 Value Engineering and Activity Based Costing/Management (pp 61-67). (AACE Certification Preparatory course), Lagos, Nigeria.