A business is using a decision tree to decide whether to invest textsterling5 million on a new piece of machinery. It estimates that there is a probability of 0.6 that the new machine will increase sales by textsterling4 million and a 0.4 probability that sales will increase by textsterling8 million. What is the expected value?

CHAPTER 7 ENTREPRENEURIAL LEADERSHIP AND MANAGEMENT

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A business is using a decision tree to decide whether to invest £5 million on a new piece of machinery. It estimates that there is a probability of 0.6 that the new machine will increase sales by £4 million and a 0.4 probability that sales will increase by £8 million. What is the expected value?

A	£5.6 million
B	£5 million
C	£0.6 million
D	£1.4 million

Explanation:

Detailed explanation-1: -The Expected Value (EV) shows the weighted average of a given choice; to calculate this multiply the probability of each given outcome by its expected value and add them together eg EV Launch new product = [0.4 x 30] + [0.6 x-8] = 12-4.8 = £7.2m.

Detailed explanation-2: -The benefit of a decision tree is that it lists out all the possible outcomes and the revenue or loss attached to each. Information available can then be used by the management of the company to make an informative decision about the project or the investment they are planning to make.

Detailed explanation-3: -For example, a decision tree could be used to help a company decide which city to move its headquarters to, or whether to open a satellite office. Decision trees are also a popular tool in machine learning, as they can be used to build predictive models.

There is 1 question to complete.

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CHAPTER 7 ENTREPRENEURIAL LEADERSHIP AND MANAGEMENT