DECISION TREE ANALYSIS - PMI

© 2013 Dr. Kenneth F. Smith, PMP Project Management Fundamentals Slide 1

DECISION TREE ANALYSIS

Dr. Kenneth F. Smith, PMP PMI (Honolulu Chapter)

[email protected]

June 2013

mailto:[email protected]

Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP Slide 2

Consider Alternative Solutions


Which of the several possible courses of

action could be pursued?

Bias in solutions?

Consultants;

Others in

Community

Are there alternative

ways to achieve them ?

Higher / lower technology?

Less risk?

Faster / slower

implementation?

Less / more cost?

Greater / lesser chance of

sustainability?

Change in behavior?


The Decision Tree Technique

for weighing & considering

PROJECT SCOPE

Alternatives


Identify the BASELINE Situation & Any

ALTERNATIVES (With Additive Costs),

and arrange them as separate Branches

of the “Tree”

Baseline

Alt “A” $

Alt “B” $$


Identify the EXPECTED RESULTS anticipated

from the Baseline, and the Alternatives

Baseline

Alt “A”

Alt “B”

Expected

Results


IDENTIFY THE RISK SITUATION

Baseline

Alt “A”

Alt “B”

Risk

Situation

Expected

Results


IDENTIFY PROBABILITY OF OCCURRENCE

Baseline

Alt “A”

Alt “B”

Risk Situation &

Probability Expected

Results % Probability of

Happening

% Probability of NOT

Happening


REPEAT FOR ALL ALTERNATIVES

Baseline

Alt “A”

Alt “B”

Risk Situation &


Results % Probability

% NOT

% Probability

% Probability

% NOT

% NOT


IDENTIFY IMPACT -- EXPECTED OUTCOME

Baseline

Alt “A”

Alt “B”

Risk Situation &


Results %

% Not


IDENTIFY ANTICIPATED PAYOFF FOR

EACH POSSIBLE OUTCOME

Baseline

Alt “A”

Alt “B”

Risk Situation &


Results %

% Not

1 TOTAL COST

2 TOTAL

BENEFIT &

3 NET BENEFIT

For Each Possible

Outcome


DECISION TREES

Options

Options

&

Probabilities

&

Probabilities


CALCULATE EXPECTED MONETARY VALUE (EMV)

for EACH OPTION -- Baseline & Alternatives

Baseline

Alt “A”

Alt “B”

Risk Situation &


Results %

% Not

WORK

BACKWARDS:

1 Multiply the NET

BENEFIT of the

Outcome by its

Probability

2 Add the Results for

each ALTERNATIVE

EMV $ + $

EMV $ + $

EMV $ + $


CALCULATE BENEFIT-COST RATIO (BCR)

BCR = EMV of Alternative - EMV of Baseline

Cost of Alternative


Repeat for All Alternatives

BCR = EMV of Alternative - EMV of Baseline

Cost of Alternative

SELECT THE BEST OPTION

Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP

MAPPING & COMPUTING “EMV”

Slide 17

PMBOK

Example

NOTE: Alternatives

Only; No Baseline


PMBOK EXAMPLE 2 Risk Probabilities: Build or

Upgrade Plant for Increased Customer Demands?

1

Build a New &

More Efficient

Plant

2

Upgrade

Existing Plant

SITUATION:

Anticipate

Increased

Demand for

Electricity by

Customers in a

New Area*

Estimated

Cost $120 m

Estimated

Cost $50 m

ALTERNATIVES RISK SCENARIO

PROBABILITY

Peak Service

Demand

Max Service

Demand

Low

Demand

Low

Demand

60 %

60 %

40 %

40 %

ESTIMATED

NET REVENUE*

NET

VALUE

(ER – EC)

$200 m

$90 m

$120 m

$60 m $10 m

$70 m

-$30 m

$80 m

*After Operating Costs --

based on relative efficiencies

of the respective plants *NOTE: Existing Plant incapable of meeting any Increased

Demand for Electricity by Customers in the New Area


PMBOK EXAMPLE: Computation of Expected

Monetary Value (EMV)

1

Build a New &

More Efficient

Plant

2

Upgrade

Existing Plant

SITUATION:

Anticipate

Increased

Demand for

Electricity by

Customers in a

New Area

Estimated

Cost $120 m

Estimated

Cost $50 m


PROBABILITY

Peak Service

Demand

Max Service

Demand

Low

Demand

Low

Demand

60 %

60 %

40 %

40 %

NET

VALUE

$10 m

$70 m

-$30 m

$80 m

(P x NV)

$48 m

-$12 m

$4 m

$42 m

EMV =

$46 m

EMV =

$36 m


DECISION TREE 3 Risk Probabilities : Build /

Upgrade to meet Increased Customer Demands?

1

Build a New &

More Efficient

Plant

2

Upgrade

Existing Plant

SITUATION:

Anticipate

Increased

Demand for

Electricity by

Customers in a

New Area*

Estimated

Cost $120 m

Estimated

Cost $50 m


PROBABILITY

Peak Service

Demand

Max Service

Demand

Medium

Demand

Medium

Demand

Low

Demand

Low

Demand

30 %

30 %

10 %

10 %

60 %

60 %

ESTIMATED

NET REVENUE*

NET

VALUE

(ER – EC)

$600 m

$400 m

$200 m

$350 m

$100 m

$250 m

$50 m

$200 m

$300 m

$80 m

$280 m

$480 m

*After Operating Costs --

based on relative efficiencies

of the respective plants *NOTE: Existing Plant incapable of meeting any Increased

Demand for Electricity by Customers in the New Area


DECISION TREE 3 Risk Options: Computation

of Expected Monetary Value (EMV)

1

Build a New &

More Efficient

Plant

2

Upgrade

Existing Plant

SITUATION:

Anticipate

Increased

Demand for

Electricity by

Customers in a

New Area

Estimated

Cost $120 m

Estimated

Cost $50 m


PROBABILITY

Peak Service

Demand

Max Service

Demand

Medium

Demand

Medium

Demand

Low

Demand

Low

Demand

30 %

30 %

10 %

10 %

60 %

60 %

NET

VALUE

$50 m

$200 m

$300 m

$80 m

$280 m

$480 m

(P x NV)

$144 m

$168 m

$8 m

$5 m

$120 m

$90 m

EMV =

$215 m

EMV =

$320 m

Project Management Fundamentals © 2013 Dr. Kenneth F. Smith, PMP

Risk IMPACT Planning

Slide 22

Later we will look again at

Major Overall Risks

in terms of their impact on

the Project

Schedule & Budget

and use the Decision Tree Analysis

to estimate the size of a

Management Reserve “Buffer”

DECISION TREE ANALYSIS - PMI

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