Patrick O’Doyle asked his bank for a loan to expand his company. The bank managers have to decide whether or not to grant the loan. If they grant the loan, Patrick’s expansion may be successful or it may be unsuccessful. If the bank managers do not grant the loan, Patrick may continue banking as before, of he may move his account to another bank.
Suppose that Patrick O’Doyle’s bank currently values his business at $20,000 a year. If the manager grants the loan and the expansion succeeds, the value to the bank of increased business and interest charges is $30,000 a year. If the expansion does not succeed, the value to the bank declines to $10,000, because of lower volumes and an allowance writing-off bad debt. There is a probability of 0.7 that the expansion plan will succeed. If the manager does not grant the loan, there is a probability of 0.6 that Patrick will transfer his account to another bank.
Analyze the Patrick O’Doyle’s bank loan using a decision tree.