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Decision Tree

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Problem #1 Janis Corporation
The Janis Corporation is involved with waste management and, during the past 10 years, has become one of the largest waste disposal companies in the Midwest, serving primarily Wisconsin, Illinois, and Michigan. The company is currently considering establishing a waste treatment plant in Mississippi as well. From past experience, the company estimates that a small treatment plant in northern Mississippi would yield a $500,000 profit contribution or return regardless of the market demand for the facility. The success of a medium-sized treatment plant would, however, depend on the market. With a low demand for waste treatment, the company estimates a $200,000 contribution or return for a medium-sized facility. A medium demand would return $700,000 and high demand would return $800,000. Although establishing a large treatment facility is significantly riskier, the potential return is similarly greater. With a high demand for waste treatment in Mississippi, a large facility should return a million dollars. Medium demand would return only $400,000 given establishment of a large facility and low demand would return a loss of $200,000.
Considering the economic conditions for northern Mississippi and the experience Janis Corporation has in the field, the company estimates the probability of low demand for waste treatment in the proposed area to be 0.15. Similarly, the probability for medium demand and high demand are estimated to be 0.40 and 0.45 respectively. Because of the large potential investment and possibility of a loss, the company is also considering hiring a market research firm based in Jackson, Mississippi. The market research firm is experienced in establishing demand characteristics for large municipal projects in the state and would conduct a survey to collect data with respect to the probability of low, medium, and high demand for waste treatment services in the region. The cost of the survey is $50,000 and the firm has provided Janis Corporation with a track record for comparable survey results in the following table:
Possible Outcomes Historical Survey Results for Demand
Low Medium High
Low Demand 0.7 0.2 0.1
Medium Demand 0.4 0.5 0.1
High Demand 0.1 0.3 0.6

These are the questions:
a. Develop a decision tree or complete payoff tables to represent the alternatives and outcomes for this problem.
b. Use the expected value approach to recommend which alternative Janis Corporation should follow in order to maximize expected profit contribution or return. Provide a complete narrative of all steps taken in the decision process and the justification for the indicated recommendation.

Solution Preview

Hello there. I have provided some suggestions and a graphic to get you started.

The most important part of these questions is providing a complete narrative of all the steps you took in the decision process and the justification for the indicated recommended. So what I've done is to provide you with the steps. You should use these steps to complete question A and adapt the steps into your own words for question B. This is based on a decision tree model:

Step 1: Identify the objective of the decision making process. In this case, it is about recommending an alternative that Janis Corporation should follow in order to maximize expected profit contribution or return.

Step 2: Identify constraints or barriers to the decision making process. These are also known as sub-objectives because they are things that the company should also focus on secondarily to the objective identified in step one. The objective to increase profit, for example, is tied to long term investments unless the company has a plan to raise quick, no strings attached capital.

Step 3: List the possibilities you have for achieving the primary and ...

Solution Summary

Uses Janis Corporation to explain how to create a decision tree.