I have a decision tree here, and EMV\'s. Project is about making a prototype or

Question

I have a decision tree here, and EMV's. Project is about making a prototype or to not make it (those are the two decisions), I need some kind of Sensitive Analysis for this, any would work with an explanation behind it. A sensitivity graph would be nice, or a tornado diagram, or some kind of sensitivity analysis for this. Here is the information:

0.75 Success means: +$2,500,000 $500,000 0.25 Build Prototype Failure means: $250,000 0.25 Success means: So $2,500,000 No Prototype 0.75 Failure means $1,250,000

Explanation / Answer

Let x be the probability of success when we build the prototype and y be the probability of success when we do not build the prototype.

Thus the EMV of building the prototype is 2000x - 750(1-x)

And the EMV of not building the prototype is 2500y – 1250 (1-y)                     {All figures are in K i.e 000s}

Thus EMV of the project = sum of both EMVs as given belwo

EMV (Say z) = 2000x - 750(1-x) + 2500y – 1250 (1-y)

        = 2750x - 750 + 3750y -1250

                    z = 2750x + 3750y – 2000                   

so we can see that if we move x by 1 by .01 (i.e 1%) the EMV increases by .01*2750 = $ 27.5 K

and similarly if we increase y by .01 (i.e 1%), the EMV increases by .01*3750 = $ 37.5 K

This is the sensitivity of EMV with respect to

The same can be expressed in a graph with a linear equation dependent on the variable x and y plotted on x and y axes.

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