Purchase Solution

Decision making

Not what you're looking for?

Ask Custom Question

A firm that plans to expand its product line must decide whether to build a small or a large facility to produce the new products. If it builds a small facility and demand is low, the net present value after deducting for building costs will be $400,000. If demand is high, the firm can either maintain the small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value is $50,000.
If a large facility is built and demand is high, the estimated net present value is $800,000. If demand turns out to be low, the net present value will be -$10,000.
The probability that demand will be high is estimated to be .60, and the probability of low demand is estimated to be .40.

a. Analyze using a tree diagram.
b. Compute the EVPI. How could this information be used ?
c. Determine the range over which each alternative would be best in terms of the value of P(demand low).

Purchase this Solution
Solution Summary

This problem uses a decision tree to come up with an optimal solution given the probabilities of different demands.

Solution Preview

I have included a tree diagram in the attached spreadsheet.
<br>
<br>If the firm builds a small facility and demand is high it can either expand or maintain the facility. Since there is no more risk involved (the firm already knows that demand is high) the firm will take the more profitable option of expanding and thus the outcome for that scenario will have an NPV of $450,000.
<br>
<br>If the firm builds a small facility the NPV is 0.40 * $400,000 + 0.60 * $450,000 = $430,000
<br>If the firm builds a large facility the NPV is 0.40 * - $10,000 + 0.60 * $800,000 = $476,000
<br>The ...

Purchase this Solution
Free BrainMass Quizzes
Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Introduction to Finance

This quiz test introductory finance topics.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

View More Free Quizzes
Related BrainMass Solutions

  • Decision Making

    //Above is the discussion of Managerial Decision Making and Strategic Decision Making.

  • Rational and Carnegie Decision Making

    Carnegie Running Head: DECISION MAKING MODELS Decision Making Models Rational Decision Making Model Rational decision making is important for an individual, as well as, an organization.

  • The differences between individual and group decision-making

    593201 The differences between individual and group decision-making Conduct an internet search for information on individual versus group decision making. Then, compare and contrast individual and group decision-making.

  • decision making style

    leadership/management www.strategicmarketsegmentation.com/5-decision-making-styles/ www.decision-making-confidence.com/decision-making-style-and-examples.html www.decision-making-confidence.com/authoritative-decision-making.htm www.leadershipmanagement.com

  • Decision Making: Individual Vs. Group

    573050 Decision Making: Individual Vs. Group Compare and contrast individual and group decision-making. What are the advantages and disadvantages of each? Are there certain decisions that are better suited to individual decision-making?

  • Perception in Decision Making

    Perception during decision making can be distorted by wishful thinking. Further, the use of perception is decision making is also influenced by the decision making style of the person.

  • Decision making factors

    Introduction to Decision Making.

  • eastern philosophy in your everyday decision-making

    What are some ways you can incorporate eastern philosophy in your everyday decision-making? One of the ways n which you can incorporate eastern philosophy into every day decision making is to meditate before making an important decision.

  • GROUP DECISION MAKING

    Difference between group decision making and individual decision making The group decision making process is different from the individual decision making process in many ways.

  • Counseling Psychology's view of decision making styles

    216155 Counseling Psychology's view of decision making styles Can you briefly describe three styles of decision-making ( chosen from the mentioned decision- making styles below ).

View More Related Solutions