Draw the decision tree and derive optimal decision

Reference no: EM13193620

You are a bank manager. Ranga has approached your bank for a million dollar loan. The bank can charge 15% interest from Ranga for this loan. The bank will buy government bonds at 5% interest rate in case Ranga's application is rejected. You think there is 8% chance that Ranga would default on his loan based on your knowledge about Ranga. At a cost of about $1000, the bank can investigate and figure out Ranga's complete credit history.
Based on the past performance, you know that the credit reports give a favorable credit rating 70% of the time when the customer honors loan commitments; and unfavorable credit rating 30% of the time even when the customer honors loan commitments. The credit reports give a favorable credit rating 25% of the time and an unfavorable credit rating 75% of the time when the customer does not honor loan commitments.
• Draw the decision Tree and Derive Optimal decision
• Compute Expected Value of Perfect Information
• Compute expected Value of Sample Information

Reference no: EM13193620

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