Management Decision Model/Decision Tree
Now assume your friend, Jennifer the banker (formerly a bank teller), has asked for your advice as to whether she should quit her job and pursue her passion in order to become a restaurateur.
Assume the following facts as well as the above information:
As a banker, Jennifer makes $135,000 a year with up to a 25 percent bonus. Her maximum raise per year is 10 percent (raises are skewed to capture inflation). She has $250,000 in savings. Her expenses are $5000 a month after taxes.
Jennifer is eligible for a promotion in twelve months; the promotion comes with a 50 percent increase in pay and 25 percent bonus. She is competing with three other employees for the position. If Jennifer does not receive the promotion, in all probability she will be considered for promotion to the same position after another twelve months, be asked to stay in her current role for the foreseeable future, or be asked to leave the bank.
Jennifer enjoys her current job but she wants to manage her own business at some point in her career. She is an avid chef, having had some experience in college and afterwards. She is also personally inclined towards more entrepreneurial ventures. Jennifer gets enormous personal value out of the pursuit of her personal and professional goals.
Jennifer’s current employer focuses exclusively on small- and medium-sized business clients along with their families. If Jennifer left the bank, her former employer would be a ready and willing source of financing with a reasonable business plan in place.
Opening a restaurant will require a $200,000 cash investment for capital improvements and materials. The bank normally provides new restaurants with access to a $100,000 rolling line of credit at an 8 percent cost for the first $50,000 and a 12 percent cost for the second $50,000.
The restaurant will, in the case of modest success, lose $25,000 in the first twelve months; generate a 20 percent net profit in months 13–24, and 25 percent in months 25–36.
About this Assignment
The goal of this assignment is to thoroughly analyze Jennifer's situation through use of a decision tree which you will create. Decision trees can be drawn by hand or created in any number of software tools including Microsoft Word and Excel—even Google Docs has a resource. Through Internet research you will find there are several different decision tree tools on the market. You may want to try a free trial version application or use software that you have used in the past to create your decision tree. To get started, here are two free options you might want to investigate:
TreeMapGViz which is a Google Gadget that allows treemap generation in Google Docs. The treemap is also available through Google's visualization API.
TreePlan–Decision Trees which is an Excel add-in that enables and automates the creation of decision trees within Microsoft Excel. This is the tool chosen as an example for taking you through the steps to complete a decision tree. If you chose to use this tool, begin by downloading the free trial for this add-in from the following link: http://www.treeplan.com/
Note: You can help your fellow students locate those decision tree tools you find interesting by posting product links in the Webliography.
Choose a method for creating a decision tree. Download and review the decision tree template example offered on this page which you will use, along with your chosen method for decision tree creation, to address the following:
Map out the various scenarios that Jennifer faces—for example, bankruptcy, breakeven, modest success, home run—and produce a scenario model.
Assign probabilities to the various nodes and use the tools to offer the best advice you can.
State well-reasoned decisions about the market and Jennifer’s future prospects in your models.
Work backwards from assumption five in the above list of facts and determine, in terms of sales in dollars, how large the restaurant needs to be to break even.