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Constructing a Decision Tree

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Expando, Inc, is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility.

On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demands are high the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is .40, and the probability of it being generated is because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision.

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Solution Summary

Solution constructs the decision tree in the given case and chooses the best option.

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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