Purchase Solution

How do you use a decision tree to decide whether to build a small or a large plant at a new location?

Not what you're looking for?

Ask Custom Question

A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the location can be either small or large, with probabilities estimated to be 0.4 and 0.6 respectively. If a small plant is built, and demand is large, the production manager may choose to maintain the current size or to expand. The net present value of profits is $223,000 if the firm chooses not to expand. However, if the firm chooses to expand, there is a 50% chance that the net present value of the returns will be 330,000 and 50% chance the estimated net present value of profits will be $210,000. If a small facility is built and demand is small, there is no reason to expand and the net present value of the profits is $200,000. However, if a large facility is built and the demand and the demand turns out to be small, the choice is to do nothing with a net present value of $40,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability of .3 or favorable with a probability of .7. If the response to advertising is modest the net present value of the profits is $20,000. However, if the response to advertising is favorable, then the net present value of the profits is$220,000. Finally, the when large plant is built and the demand happens to be high, the net present value of the profits $800,000. Draw a decision tree and determine the payoff for each decision and event node. Which alternative should the manufacturer choose and what is the expected value?

Purchase this Solution
Solution Summary

This 320 word solution includes diagrams of decision trees and expected value calculations to compare options and make a desion.

Purchase this Solution
Free BrainMass Quizzes
Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.

Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

View More Free Quizzes
Related BrainMass Solutions

  • Decision-Making : Decision Trees and Payoffs

    161893 Decision-Making : Decision Trees and Payoffs Problem 14 A manufacturer must decide whether to build a small or a large plant at a new location.

  • Quanatative Methods (10 Problems) : Conservative Decisions, Events, Decision Trees, Minimax, Large and Small Demand

    A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the location can be either small or large, with probabilities estimated to be 0.4 and 0.6 respectively.

  • Reply to Decision tree

    Their decision is to build a large plant, small plant or no plant at all. With a favorable market, they can expect to make $90,000 from the large plant or $60,000 from the small plant.

  • Quantitative Methods

    64511 Quantitative Methods A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the location can be either small or large, with probabilities estimated to be0.4 and 0.6 respectively.

  • Influence Diagrams, Decision Trees and Optimistic, Conservative, and Minimax Regret Approaches

    Recommend a decision based on the use of the optimistic, conservative, and minimax regret approaches. Solutions: a. The decision to be made is whether to build a small plant or a large plant.

  • Size of Sampling Plant

    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.

  • Decision Tree

    He can either open a small store now, open a large store now, drop the idea now, or else have a market potential study conducted and then decide whether to open a small or large store or do nothing.

  • Probability Questions

    A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the location can be either small or large, with probabilities estimated to be 0.4 and 0.6 respectively.

  • Decision Analysis

    341751 Decision Analysis A manufacturer of designer jeans must decide whether to build a large factory or a small factory in a particular location. The profit per pair of jeans manufactured is estimated as $10.

View More Related Solutions