New Versus Used Car Decision Tree
Build a decision tree to help you decide if you want to purchase a new car or a used car. The biggest concern or risk with purchasing a used car is the potential need for repairs and not knowing about any previous problems the car might have had. There is a 40% chance that a used car will need to be repaired within a one-year period; however, there is a 90% chance that the new car will not need any repairs during the same period. The cost for a used car is $7,500, and the cost for a new car is $15,000.
1. Use the information in the table below to decide whether you should buy a used car versus a new car. Pick the decision with the lower investment required. 2. Create a decision tree to show outcomes for each decision node using the SilverDecisions website (http://silverdecisions.pl/SilverDecisions.html?lang=en (Links to an external site.)). Note: While the SilverDecisions tool is intuitive, you can find a manual at http://silverdecisions.pl/ (Links to an external site.).3. Calculate the expected value of each outcome and show your calculations (Probability x Impact).4. Export your decision tree as a .png file and save it on your computer.5. Explain the best option based on the outcome and why.
Cost to buy a new car
$15,000Cost to buy a used car$7,500Probability of not having any repairs within one year90%Probability of repairing a used car within one year40%Cost of repairs for new car$5,000Cost of repairs for used car$9,000
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