The B&BC is in a dilemma over whether to repair or replace one of their packaging lines. Repairing the plant would lead to a maintenance type project whereas replacing the plant involves a plant selection and supply project. New plant would cost £30,000 whereas the existing plant could be overhauled for £10,000. The problem is that there is judged to be only a 30% chance that an overhaul would be a success. If the overhaul is not successful a major rebuild becomes necessary at a cost of £20,000. Carrying out a major rebuild would effectively resolve the problems. If B&BC tried to cut their losses after overhauling the plant for £10,000, the semi-refurbished plant would have a trade in value of £15,000. When B&BC commission the new or completely refurbished plant there is a 20% chance of teething trouble. B&BC could meet the shortfall in capacity by spending £6,000 on subcontracting. If they take no action they have a 40% chance that they will lose orders worth £25,000.
1. Draw and fold back the decision tree for the B&BC case.
2. In the example above, what action, and hence which project option, should B&BC choose?
3. What are the advantages of considering alternatives by drawing up a decision tree?
4. How does the concept of expected value aid the decision making process?
5. If expected value is really only applicable to repetitive situations, how can it be applied to projects, which by their nature are only 'one-offs'?