Probability Analysis


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Probability Analysis

Decision tree model.

This is more useful in calculating probabilities in a combined form. It assists to map out probabilities of several graphs with no use of sophisticated probability equations. The tree makes one to easily outline when to multiply and add and also enables you see a graph of the problem you have.

Facilitydemand optionsprobability

165036516510000303022087630000.4Low demand0.2

17125951130300045720025273000Small facility

3030220107315000.50.6High demand0.3


165036518097500308419573660000.50.4Low demand0.2

171259511430000171259511430000Large facility

303022055245000.6High demand0.5

Probability calculations, the tree consists of two main parts the end point and branches. We multiply alongside the branches as well as add probabilities down the lines and this should sum up to 1.

Small facility – low demand- 0.5* 0.4 = 0.2

High demand- 0.5*0.6 =0.3

Large facility- low demand – 0.5* 0.4 =0.2

High demand – 0.5 * 0.6 = 0.3

Determination of expected value, this we forecast to get in the long run while calculating the probabilities. We multiply the probability with the give expected payoffs.

Small facility – low demand = 0.2*$40 = $8

High demand =0.3* $55 =$16.5

Large facility – low demand= 0.2* $50 =$ 10

High demand =0.3*$70 =$ 21

The GM had to decide on the new facility must be build large basing on the probability analysis carried out. In considering the expected monetary value calculated we can opt for building a large facility since the outcome in both low and high demand is $10 and $21 respectively while the small facility has low expected value of $8 and $ 16.5 in both demand options. Thus, the General Manager chooses to build a large facility because of its promising outcomes as compared to having a small facility. In regards to the calculation of the probability the GM was placed in a position to know which size to take in relation to his/her expected value. This is why the GM was able to opt for large size basing on the calculated expected monetary value. The expected value can be that you can attain using the probability of occurrences given.