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Decisions in an ever changing economy

A home products discount store is considering expanding its capacity to meet a growing demand for its products. The alternatives are to build a new store, expand and refurbish the old store, or do nothing. Economists have projected the regional economic outlook: a 50% probability that the economy will remain unchanged (stable); a 20% probability of an economic upturn; and a 30% probability of an economic downturn.

The following estimates of annual returns have been prepared (in millions of dollars):
Market Downturn Stable Market Market Upturn
Build new store $ (0.8) $0.5 $2.1
Expand old store (0.4) 0.8 1.4
Do nothing (0.1) 0.2 0.5

Use a decision tree to analyze these decision alternatives.

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After computation, it was found out that the second option ...

Solution Summary

This solution is about a home products discount store thinking of expanding its capacity to meet a growing demand for its products. Given the parameters and the state of the economy, the alternative choices are building an new store, expand old store, and do nothing. It was found out that the second option (expand old building) has the highest aggregate expected value.

$2.19