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A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated...

A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively.
A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000;
it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is ex- pected to earn $75,000 and can be expanded to medium size to earn $60,000 or to large size to earn $125,000.
A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000.
If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the large facility, the present value is expected to be $125,000; if demand is low, the facility is expected to lose $60,000.
a. Draw a decision tree for this problem.
b. What should management do to achieve the highest
expected payoff?
c. Which alternative is best, according to each of the fol- lowing decision criterion?
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A manager is trying to decide whether to build a small, medium, or large facility. Demand
can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35,
respectively.
A...

Sign up to view the full answer

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