Evaluating R&D Investment Decisions with Decision Trees PPT

This PPT slide, part of the 654-slide Business Unit Strategy Training Program PowerPoint presentation, illustrates the application of a decision tree to evaluate an investment decision for an automaker considering a USD 130,000 R&D project. It emphasizes the importance of calculating the Expected Monetary Value (EMV) at various decision nodes to guide strategic choices. The process begins at the end of the decision tree, where the EMV for each outcome is determined.

The automaker faces a choice to proceed with the R&D investment or not. If they choose to proceed, they can either build a large plant or a small plant, each associated with different potential market outcomes. The outcomes are quantified in terms of monetary values, reflecting the projected cash flows in various market conditions—high, medium, and low.

Calculating the EMV involves summing the weighted outcomes based on their probabilities. For instance, the EMV for the large plant is calculated using the formula provided, which incorporates probabilities and potential cash flows. The decision tree visually represents these calculations, allowing for a clear comparison of potential paths.

The slide also highlights the significance of the initial decision node. If the EMV for this node is positive, it suggests that proceeding with the R&D is a favorable choice. The slide effectively communicates a structured approach to decision-making, providing a framework that can be applied to similar investment scenarios. This method not only clarifies potential financial outcomes, but also aids in risk assessment, making it a valuable tool for executives weighing significant investments.

This slide is part of the Business Unit Strategy Training Program PowerPoint presentation.

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