A
Complete Chapters Included
B U S I N E S S A N A L Y T I C S M O D U L E
Decision-Making Tools
DISCUSSION QUESTIONS
1. The six steps of the decision-making process are:
1. Clearly define the problem and the factors that influence it.
2. Develop specific and measurable objectives.
3. Develop a model.
4. Evaluate each alternative solution.
5. Select the best alternative.
6. Implement the solution.
AACSB: Reflective Thinking
2. The purpose of this question is to make students use a personal experience to distinguish between good and bad decisions. A “good”
decision is one that is based on logic and all available information.
A “bad” decision is one that is not based on logic and all available information. It is possible for an unfortunate or undesired
outcome to result from a “good” decision (witness a patient expiring after open-heart surgery). It is also possible to have a favorable or
desirable outcome result from a “bad” decision (you win at Blackjack, even though you drew a card when you already held an “18”).
AACSB: Reflective Thinking
3. The equally likely model selects the alternative with the highest average value; it assumes each state of nature is equally likely to occur.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
4. The basic difference between decision making under certainty, risk, or uncertainty is based on the nature and amount of chance or risk that
is involved in making the decision. Decision making under certainty assumes that we know with complete confidence the outcomes that
result from our choice of each alternative. Decision making under risk implies that we do not know the specific outcome that will result
from our choice of a particular alternative, but that we do know the set of possible outcomes, and that we are able to objectively measure
or estimate the probability of occurrence of each of the outcomes in the set. Decision making under uncertainty implies that we do not
know the specific outcome that will result from our choice of a particular alternative; we know only the set of possible outcomes and are
unable to objectively measure or estimate the probability of occurrence of any of the outcomes in the set.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
5. A decision tree is a graphic display of the decision process that indicates decision alternatives, states of nature and their respective
probabilities, and payoffs for each combination of alternative and states of nature.
LO A.6: Evaluate the nodes in a decision tree
AACSB: Application of knowledge
Copyright © 2026 439
,440 BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S
6. Decision trees can be used to aid decision making in such areas as capacity planning (Supplement 7), new product analysis
(Chapter 5), location analysis (Chapter 8), scheduling (Chapter 15), and maintenance (Chapter 17).
LO A.6: Evaluate the nodes in a decision tree
AACSB: Application of knowledge
7. EVPI is the difference between payoff under certainty and maximum EMV under risk.
LO A.5: Compute the expected value of perfect information (EVPI)
AACSB: Reflective Thinking
8. Expected value with perfect information is the expected return if we have perfect information about the states of nature before a
decision has to be made.
LO A.5: Compute the expected value of perfect information (EVPI)
AACSB: Reflective Thinking
9. Decision tree steps:
1. Define the problem.
2. Structure or draw the decision tree.
3. Assign probabilities to the states of nature.
4. Estimate payoffs for each possible combination of alternatives and states of nature.
5. Solve the problem by computing the EMV for each state of nature node.
LO A.6: Evaluate the nodes in a decision tree
AACSB: Reflective Thinking
10. Maximax considers only the best outcomes, while maximin considers only worst-case scenarios.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
11. The expected value is useful for repeated decisions because it is an averaging process. However, it averages out the extreme
outcomes. A rational decision maker is concerned with these extreme outcomes and will incorporate them into the decision-making
process.
LO A.4: Calculate an expected monetary value (EMV)
AACSB: Reflective thinking
12. Decision trees are most useful for sequences of decisions under risk.
LO A.7: Create a decision tree with sequential decisions
AACSB: Reflective thinking
Copyright © 2026
, BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S 441
END-OF-MODULE PROBLEMS
A.1
A.2
(b) Maximax decision: very large station
(c) Maximin decision: small station
(d) Equally likely decision: very large station
(e)
The first station should be very large, with EMV = $55,000.
Copyright © 2026
, 442 BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S
A.3 (a) EMV (large stock) = 0.3(22) + 0.5(12) + 0.2(–2) = 12.2
EMV (average stock) = 0.3(14) + 0.5(10) + 0.2(6) = 10.4
EMV (small stock) = 0.3(9) + 0.5(8) + 0.2(4) = 7.5
Maximum EMV is large inventory = $12,200
(b) EVPI = $13,800 – 12,200 = $1,600
where $13,800 = 0.3(22) + 0.5(12) + 0.2(6)
A.4 Note: In the text, the states of nature appeared in the left column and the decision alternative across the top row. This is to let students
know that data are sometimes presented in alternative formats.
(a)
States of Nature
Slight Major
Fixed Increase Increase Minimum
N (No) $0 $2,000 $3,000 $0
Decision M (Moderate) −4,000 8,000 9,000 −4,000
Alternatives L (Large −10,000 6,000 20,000 −10,000
D (Double) −50,000 4,000 40,000 −50,000
(b) She should use the maximin criterion—no floor space (N).
A.5 (a) EMV (assembly line) = (0.4)($10,000) + (0.6)($40,000) = $28,000
EMV (plant) = (0.4)(– $100,000) + (0.6)($600,000) = $320,000
EMV (nothing) = 0
Select the new plant option.
(b) EVPI = $364,000 − 320,000 = $44,000
A.6
Row Average
Increasing capacity $700,000
Using overtime $700,000
Buying equipment $733,333 ←
Using equally likely, “Buying equipment” is the best option.
A.7 (a) EMV (Alt. 1) = (0.4)(10,000) + (0.6)(30,000)
= $22,000
EMV (Alt. 2) = (0.4)(5,000) + (0.6)(40,000) = $26,000
EMV (Alt. 3) = (0.4)(−2,000) + (0.6)(50,000)
= $29,200
So the Max EMV is Alternative 3.
Copyright © 2026
Complete Chapters Included
B U S I N E S S A N A L Y T I C S M O D U L E
Decision-Making Tools
DISCUSSION QUESTIONS
1. The six steps of the decision-making process are:
1. Clearly define the problem and the factors that influence it.
2. Develop specific and measurable objectives.
3. Develop a model.
4. Evaluate each alternative solution.
5. Select the best alternative.
6. Implement the solution.
AACSB: Reflective Thinking
2. The purpose of this question is to make students use a personal experience to distinguish between good and bad decisions. A “good”
decision is one that is based on logic and all available information.
A “bad” decision is one that is not based on logic and all available information. It is possible for an unfortunate or undesired
outcome to result from a “good” decision (witness a patient expiring after open-heart surgery). It is also possible to have a favorable or
desirable outcome result from a “bad” decision (you win at Blackjack, even though you drew a card when you already held an “18”).
AACSB: Reflective Thinking
3. The equally likely model selects the alternative with the highest average value; it assumes each state of nature is equally likely to occur.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
4. The basic difference between decision making under certainty, risk, or uncertainty is based on the nature and amount of chance or risk that
is involved in making the decision. Decision making under certainty assumes that we know with complete confidence the outcomes that
result from our choice of each alternative. Decision making under risk implies that we do not know the specific outcome that will result
from our choice of a particular alternative, but that we do know the set of possible outcomes, and that we are able to objectively measure
or estimate the probability of occurrence of each of the outcomes in the set. Decision making under uncertainty implies that we do not
know the specific outcome that will result from our choice of a particular alternative; we know only the set of possible outcomes and are
unable to objectively measure or estimate the probability of occurrence of any of the outcomes in the set.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
5. A decision tree is a graphic display of the decision process that indicates decision alternatives, states of nature and their respective
probabilities, and payoffs for each combination of alternative and states of nature.
LO A.6: Evaluate the nodes in a decision tree
AACSB: Application of knowledge
Copyright © 2026 439
,440 BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S
6. Decision trees can be used to aid decision making in such areas as capacity planning (Supplement 7), new product analysis
(Chapter 5), location analysis (Chapter 8), scheduling (Chapter 15), and maintenance (Chapter 17).
LO A.6: Evaluate the nodes in a decision tree
AACSB: Application of knowledge
7. EVPI is the difference between payoff under certainty and maximum EMV under risk.
LO A.5: Compute the expected value of perfect information (EVPI)
AACSB: Reflective Thinking
8. Expected value with perfect information is the expected return if we have perfect information about the states of nature before a
decision has to be made.
LO A.5: Compute the expected value of perfect information (EVPI)
AACSB: Reflective Thinking
9. Decision tree steps:
1. Define the problem.
2. Structure or draw the decision tree.
3. Assign probabilities to the states of nature.
4. Estimate payoffs for each possible combination of alternatives and states of nature.
5. Solve the problem by computing the EMV for each state of nature node.
LO A.6: Evaluate the nodes in a decision tree
AACSB: Reflective Thinking
10. Maximax considers only the best outcomes, while maximin considers only worst-case scenarios.
LO A.3: Explain when to use each of the three types of decision-making environments
AACSB: Reflective thinking
11. The expected value is useful for repeated decisions because it is an averaging process. However, it averages out the extreme
outcomes. A rational decision maker is concerned with these extreme outcomes and will incorporate them into the decision-making
process.
LO A.4: Calculate an expected monetary value (EMV)
AACSB: Reflective thinking
12. Decision trees are most useful for sequences of decisions under risk.
LO A.7: Create a decision tree with sequential decisions
AACSB: Reflective thinking
Copyright © 2026
, BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S 441
END-OF-MODULE PROBLEMS
A.1
A.2
(b) Maximax decision: very large station
(c) Maximin decision: small station
(d) Equally likely decision: very large station
(e)
The first station should be very large, with EMV = $55,000.
Copyright © 2026
, 442 BUSINESS ANALYTICS MODULE A D E C I S I O N - M A K I N G T O O L S
A.3 (a) EMV (large stock) = 0.3(22) + 0.5(12) + 0.2(–2) = 12.2
EMV (average stock) = 0.3(14) + 0.5(10) + 0.2(6) = 10.4
EMV (small stock) = 0.3(9) + 0.5(8) + 0.2(4) = 7.5
Maximum EMV is large inventory = $12,200
(b) EVPI = $13,800 – 12,200 = $1,600
where $13,800 = 0.3(22) + 0.5(12) + 0.2(6)
A.4 Note: In the text, the states of nature appeared in the left column and the decision alternative across the top row. This is to let students
know that data are sometimes presented in alternative formats.
(a)
States of Nature
Slight Major
Fixed Increase Increase Minimum
N (No) $0 $2,000 $3,000 $0
Decision M (Moderate) −4,000 8,000 9,000 −4,000
Alternatives L (Large −10,000 6,000 20,000 −10,000
D (Double) −50,000 4,000 40,000 −50,000
(b) She should use the maximin criterion—no floor space (N).
A.5 (a) EMV (assembly line) = (0.4)($10,000) + (0.6)($40,000) = $28,000
EMV (plant) = (0.4)(– $100,000) + (0.6)($600,000) = $320,000
EMV (nothing) = 0
Select the new plant option.
(b) EVPI = $364,000 − 320,000 = $44,000
A.6
Row Average
Increasing capacity $700,000
Using overtime $700,000
Buying equipment $733,333 ←
Using equally likely, “Buying equipment” is the best option.
A.7 (a) EMV (Alt. 1) = (0.4)(10,000) + (0.6)(30,000)
= $22,000
EMV (Alt. 2) = (0.4)(5,000) + (0.6)(40,000) = $26,000
EMV (Alt. 3) = (0.4)(−2,000) + (0.6)(50,000)
= $29,200
So the Max EMV is Alternative 3.
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