Decision Tree

Based on this below information I have to create a Decision Tree using excel q

1. Document a decision in a decision tree.

2. Assign a probability of occurrence for the risk pertaining to that decision.

3. Assign monetary value of the impact of the risk when it occurs.

4. Compute the Expected Monetary Value for each decision path.

The article then went on to use the example of an organization using legacy software. Some stakeholders believed that upgrading the software would save them millions while others wanted to continue to use the legacy software because it was safe, even though it wasn’t meeting current company needs. Stakeholders supporting the new software were torn between buying new software verses building the software in house. By exploring all possibilities and consequences you can have a better and more informed Project Risk Management Decision using the Decision Tree Analysis.

In the Decision Tree Analysis for this scenario they looked a 3 options:

Build new software: estimated cost of $500,000

Buy new software: estimated cost of $750,000

Stay with the legacy software: just maintenance of $100,000

Now we calculate the EMV for each decision. Which from the earlier definition we know calculated by multiplying the probability of the risk with the impact.

Build new software: $2,000,000 * 0.4 = $800,000

Buy the new software: $2,000,000 * 0.05 = $100,000

Stay with the legacy software: $2,000,000 * 1= $2,000,000

Now, add the setup cost to the EMV

Build new software: $500,000 + $800,000 = $1,300,000

Buy new software: $750,000 + $100,000 = $800,000

Stay with the legacy software: $100,000 + $2,000,000 = $2,100,000

With this information we can see that buying new software is the most cost effective option, even though the initial set up is higher and staying with the legacy software is the most expensive option.