T 0 + : Approach: Use of a decision tree seems appropriate as Silicon, Inc., has the basic ingredients: a choice of decisions, probabilities, and payoffs. Solution: In Figure 5.14 we draw a decision tree with a branch for each of the three decisions, assign the respective probabilities payoff for each branch, and then compute the respective EMVs. top branch: The expected monetary values (EMVS) have been circled at each step of the decision tree. For the EMV (Purchase CAD system)=(.4)($1,000,000)+(.6)(-$20,000) = $388,000 This figure represents the results that will occur if Silicon, Inc., purchases CAD. The expected value of hiring and training engineers is the second series of branches: EMV (Hire/train engineers) = (.4)($875,000)+(.6)($25,000) = $365,000 The EMV of doing nothing is $0. Because the top branch has the highest expected monetary value (an EMV of $388,000 vs. $365,000 vs. $0), it represents the best decision. Management should purchase the CAD system. 2014 Pearson Education, Inc. 5-50 50 50