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Calculate optimal facility expansion using a tree diagram.

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A firm that plans to expand its product line must decide whether to build a small or 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 of $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.

Analyze using a tree diagram.

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Solution Summary

This problem evaluates the different product line expansion options for a manufacturing plant based on external factors.

Solution Preview

I have included a tree diagram in the attached spreadsheet.
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<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 ...

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