Decision Trees Example - Building the Decision Tree to Use in Decision Tree Analysis
In this scenario, you can either:
Build the new software: To build the new software, the associated cost is $500,000.
Buy the new software: To buy the new software, the associated cost is $750,000.
Stay with the legacy software: If the company decides to stay with the legacy software, the associated cost is mainly maintenance and will amount to $100,000.
Looking at the options listed above, you can start building the decision trees as shown in the diagram. By looking at this information, the lobby for staying with the legacy software would have the strongest case. But, let’s see how it pans out. Read on.
The Buy the New Software and Build the New Software options will lead to either a successful deployment or an unsuccessful one. If the deployment is successful then the impact is zero, because the risk will not have materialized. However, if the deployment is unsuccessful, then the risk will materialize and the impact is $2 million. The Stay with the Legacy Software option will lead to only one impact, which is $2 million, because the legacy software is not currently meeting the needs of the company. Nor, will it meet the needs should there be growth. In this example, we have assumed that the company will have growth.
In this example, Decision Trees analysis will be used to make the project risk management decision. The next step is to compute the Expected Monetary Value for each path in the Decision Trees. Let's see how this helps in this Decision Trees example.