Less Than Perfect Prediction - Case 1
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Imperfect Prediction - Case 1

Example of unique binary decision

The following simplistic analysis will ignore some accounting & finance principles only to help us understand the fundamental mechanics of valuation in data analytics. Such simplification leads in general to overly optimistic results and should be avoided in practice.

Let's assume the market has a potential size of $10M and with the traditional approach the company was reaching 50% of it (the baseline). The question is whether a new data analytic project is profitable knowing the implementation cost of $1M, operation cost of $2M, and that it may allow for reaching about 85% of the potential market.

Data Analytics Creates Value

The decision tree analysis suggests that the project will help increase the revenue by $3.5M (from $5M to $8.5M) with an extra expense of $3M. Even before any financial engineering the project appears profitable thus it should be given further consideration.