Question

Mr Rammalo ,the hospital administrator for Steve Biko hospital is trying to determine whether to build a large wing onto the existing hospital,a small wing or no wing at all if the patient population of Steve Biko Hospital continues to grow a large wing could return R2 550 000 to the hospital each year if the small wing were build it will return R 1 800 000 to the hospital each year if the patient population continues to grow. if the patient population of Steve Biko hospital remains the same, the hospital would encounter a loss of R 1 500000 if the large wing were build. furthermore , a loss of R 950 000 would be realized if the small wing were constructed and the patient population remain the same. if Mr Rammalo gathers additional information from expects about the future patient population of Steve Biko Hospital , the results could be either favorable or unfavorable, but it will cost him R65 000 to gather the information. Mr Rammalo believes that there is a 65% Chance that the information will be favorable without gathering additional information, Mr Rammalo estimates that the probability of a favorable patient turnout in the hospital is 0.75 . a favorable report from the study would increase the probability of a favorable f patient turnout in the hospital to 0.85 furthermore ,an unfavorable report from the additional information would decrease the hospital to 0.25 of course Mr Rammalo could forget all of these numbers and do nothing.

A. construct a decision tree to represent this problem?

B ,WHAT IS YOUR ADVICE TO MR RAMMALO as a decission analyst ?

Answer 1

a)

Decision tree is following:

b)

Expected Value of Build a large wing is the highest.

Therefore, as a decision analyst, I would advise Mr Rammalo to Build a large wing.

The Expected Value (return) of this decision = 0.75*2550000+0.25*(-1500000) = R 1,537,500