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...


A manager is trying to decide whether to build a small, medium or large facility. Demand<br>can be low, average or high, with the estimated probabilities being 0.25, 0.40 and 0.35,<br>respectively.<br>A small facility is expected to earn an after-tax net present value of just $18,000 if<br>demand is low. If demand is average, the small facility is expected to earn $75,000; it can<br>be increased to medium size to earn a net present value of $60,000. If demand is high, the<br>small facility is expected to earn $75,000 and can be expanded to medium S60,000 or<br>large to earn $125,000.<br>A medium-sized facility is expected to lose an estimated $25,000 if demand is low and<br>earn $140,000 if demand is average. If demand is high, the medium-sized facility is<br>expected to earn a net present value of $150,000; it can be expanded to a large size for a<br>net payoff of $145,000.<br>If a large facility is build and demand is high, earnings are expected to be $220,000. If<br>demand is average for the large facility, the present value is expected to be $125,000; if<br>demand is low, the facility is expected to lose $60,000.<br>a) Draw a decision tree for this problem.<br>b) What should management do to achieve the highest expected payoff?<br>

Extracted text: 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 expected to earn $75,000 and can be expanded to medium S60,000 or large 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 build 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?

Jun 02, 2022
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