Example Decision Tree

Figure 3

Thus, in this case using our revenue predictions of $8M and $2M, we have a 48%change of making $5M if we offer this service. Of course, most environments are more complex than this, so there will be multiple branches on the decision tree, each showing one possible outcome. Using this tree the analysts can decide whether to go ahead or not. The project team would help to determine the probabilities and impacts for this analysis.

■ expected monetary value

The product of an event's probability of occurrence and the gain or loss that will result if it occurs is the Expected Monetary Value (EMV) of that event. EMV can be used to compare alternatives.

Consider the following example, in which the PM faces a choice, and he wants to know what is the least risky or most advisable path to follow:

Figure 3

Choice A: accept an FFP contract to design and install new network in an office floor area for $315,000 with a liquidated damages clause because the buyer needs the network running for his opening event Or

Choice B: accept the same FFP for $250,000 without the clause. The "penalty" will be $150,000 if schedule not met with acceptable product

There is a 60% chance your cost will be $190,000 and a 40% chance your cost will be $160,000. There is a 98% chance of meeting the schedule

Decision Tree

Figure 4

Choose without clause

Figure 4

Decision Tree Continued:

Outcome Probability a) 60% x b) 40% x

Outcome Value

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