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576 CHAPTER 13 DECISION ANALYSIS

Upgrade the airport

Net financial impact for
Outcomes Probability the city (millions)

AirXpress establish a regional centre 0.1 E1.5
DRI builds manufacturing plant 0.4 E2.5
AirXpress establish a regional centre and 0.3 E6
DRI builds manufacturing plant
Neither AirXpress or DRI locate to the city 0.2 E2
If AirXpress locate to the airport this will bring an estimated E3.5 million into the city but will have cost E2
million giving a net financial impact of E1.5 million. Similarly, if DRI builds a manufacturing plant this will bring
E4.5 million into the city but cost E2 million. If both companies decide to relocate to the city the combined
benefit will be E8 million but again at a cost of E2 million to the city giving a net benefit of E6 million. However,
if neither company locates to the city the cost of upgrading the airport will have been for nothing so the net
effect will be E2 million. On the other hand if the city decides not to upgrade the airport, there are only two
outcomes as AirXpress will definitely not create a regional centre at the airport. Again, the financial conse-
quences can be determined. If DRI does not build the plan the net effect is zero. If DRI does build the plant this
will bring E4.5 million but without any cost to the city (Exhibit 13.3).
No upgrade of the airport
Net financial impact for the
Outcomes Probability city (millions)
DRI does not build manufacturing plant 0.4 0
DRI builds manufacturing plant 0.6 E4.5
We can summarize the decision situation with a decision tree and calculate the relevant expected values.
Using TreePlan we have the decision tree shown below in Exhibit 13.4. This shows that the decision to upgrade
0.1
AirXpress set up regional centre
1.5
1.5 1.5

0.4
DLI set up plant
2.5
Airport upgrade 2.5 2.5

0 2.55 0.3
Both companies locate
6
6 6

0.2
2 Neither company locate
2.7 –2
–2 –2
0.4
No DLI plant
0
No airport upgrade 0 0

0 2.7 0.6
DLI set up plant
4.5
4.5 4.5

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