Address the following requirements:

• Develop a decision tree for the case described.
• Explain the process of developing a decision tree, draw the decision tree (include the decision tree in an appendix showing chance nodes, probabilities, outcomes, expected values, and net expected value).
• Defend your final decision based on your decision tree.

Case for consideration—An operations manager for a cereal producer is faced with a choice of:

1. A large-scale investment (A) to purchase a new cooker which could produce a substantial pay-off in terms of increased revenue net of costs but requires an investment of 3,750,000 Saudi Riyal. After extensive market research it is thought that there is a 40% chance that a pay-off of 9,375,000 Saudi Riyal will be realized, but there is a 60% chance that it will be only 3,000,000 Saudi Riyal.
2. A smaller scale project (B) to refurbish an existing cooker. At 1,875,000 Saudi Riyal, this option is less costly but produces a lower pay-off. Again, extensive research data suggests a 30% chance of a gain of 3,750,000 Saudi Riyal but a 70% chance of it being only 1,875,000 Saudi Riyal.
3. Continuing the present operation without change (C) which cost nothing, but produces no pay-off.

Directions:

• Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
• Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles.

Developing a Decision Tree

Decision trees are used for representing and deriving an issue diagrammatically with the intention that expected solutions could be inferred. The diagram also represents every possible action courses together with their significances (Kotsiantis, 2013). Particularly, it is beneficial when it comes to making more than one decision, and there are numerous outcomes of the decision making at each stage’s nodes. An organization will be allowed by the decision tree for evaluating the different action courses’ benefits and costs for finding the best. 

Tree Diagram Analysis

            The tree diagram below involves several branches and nodes, including three chance events and one decision point. On the diagram’s left, the first note indicates that there are three choices for the manager: make a large scale project investment, make a small scale project investment, or focus on the current operations. From this point of decision, each branch shows the action course that the manager can take. There is one more node at the end of all branches, showing the chance outcome, whether there will be a low or high payoff in every decision. From each node, the following branches demonstrate the alternative outcomes of the event. The square nodes in this tree diagram signify the decision point, while the chance events are represented by the circular nodes. Grounded on the issue at hand, there are three major decisions that can be made by the managers.

            Executives in decision-making go farther than the superficial factors impacting operations of a firm (Alkaraan, 2015). Going further than only the alternatives’ representation in a tree diagram, the manager needs to consider the returns, costs and a specific action course’ probabilities. Grounded on the question’s data:

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