Share
Explore BrainMass

Size of Sampling Plant

I am having trouble answering the following questions to the problem below. I am required to:

(1) Analyze the problem using a decision tree, and
(2) Determine the Maximin Alternative

(Prob. 3: Decision Analysis)

A firm must decide whether to construct a small, medium, or large stamping plant. A consultant's report indicates a 0.2 probability that demand will be low and a 0.8 probability that demand will be high. If the firm builds a small facility and demand turns out to be low, the net present value will be $42 million. If demand turns to be high, the firm can either subcontract and realize the net present value of $42 million or expand greatly for a net present value of $48 million. The firm could build a medium-size facility as a hedge: If demand turns out to be low, its net present value is estimated at $22 million; if demand turns out to be high, the firm could do nothing and realize a net present value of $46 million, or it could expand and realize a net present value of $50 million. If the firm builds a large facility and demand is low, the net present value will be -$20 million, whereas high demand will result in a net present value of $72 million.

Solution Preview

See the attached file. To construct a decision tree, you create a branch for each possible option, and then additional branches for each possible outcome after the decisions are made. ...

Solution Summary

This solution consists of an attached .bmp image detailing a decision tree for this case, as well as simple calculations for finding the minimum and maximum values to determine the minimax decision.

$2.19