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    Expected Value Criteria

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    Carlisle Tire and Rubber, Inc., is considering expanding production to meet potential increases in the demand for one of its tire products. Carlisle's alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. The market for this particular tire product may expand, remain stable, or contract. Carlisle's marketing department estimates the probabilities of these market outcomes as 0.25, 0.35, and 0.40, respectively. The file P07_36.xlsx contains Carlisle's estimated payoff (in dollars) table.

    Market outcome
    Expands Stable Contracts
    Decision Construct new plant $400,000 -$100,000 -$200,000
    Expand existing plant $250,000 -$50,000 -$75,000
    Do nothing $50,000 $0 -$30,000

    Use the appropriate Excel computations to identify the strategy that maximizes this tire manufacturer's expected profit. What is the right decision?

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    Solution Preview

    Please refer attached file for better clarity of formulas.

    Expected profit in case decision is - Construct new plant=probability in case market expands*Profit in case market expands+probability in case market remains stable*profit in case market remains ...

    Solution Summary

    Solution describes the steps to determine the correct decision based on expected value approach.