A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40, 0.35, and 0.25, respectively. A small facility is expected to earn an after-tax net present value of just $13,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $50,000 or to large size to earn $100,000. A medium-sized facility is expected to lose an estimated $50,000 if demand is low and earn $100,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $125,000; it can be expanded to a large size for a net payoff of $175,000. If a large facility is built and demand is high, earnings are expected to be $180,000. If demand is average for the large facility, the present value is expected to be $80,000; if demand is low, the facility is expected to lose $70,000. Choose the correct decision tree below. Note that each payoff is given in thousands ($000). What should management do to achieve the highest expected pay off? The management should build a (small facility, medium facility, large facility) in order to achieve the highest expected payoffoff of $_____. (Enter your response as a whole number
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40, 0.35, and 0.25, respectively. A small facility is expected to earn an after-tax net present value of just $13,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $50,000 or to large size to earn $100,000. A medium-sized facility is expected to lose an estimated $50,000 if demand is low and earn $100,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $125,000; it can be expanded to a large size for a net payoff of $175,000. If a large facility is built and demand is high, earnings are expected to be $180,000. If demand is average for the large facility, the present value is expected to be $80,000; if demand is low, the facility is expected to lose $70,000. Choose the correct decision tree below. Note that each payoff is given in thousands ($000). What should management do to achieve the highest expected pay off? The management should build a (small facility, medium facility, large facility) in order to achieve the highest expected payoffoff of $_____. (Enter your response as a whole number
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Question
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40, 0.35, and 0.25, respectively.
A small facility is expected to earn an after-tax net present value of just $13,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $50,000 or to large size to earn $100,000.
A medium-sized facility is expected to lose an estimated $50,000 if demand is low and earn $100,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $125,000; it can be expanded to a large size for a net payoff of $175,000.
If a large facility is built and demand is high, earnings are expected to be $180,000. If demand is average for the large facility, the present value is expected to be $80,000; if demand is low, the facility is expected to lose $70,000.
Choose the correct decision tree below. Note that each payoff is given in thousands ($000).
What should management do to achieve the highest expected pay off? The management should build a (small facility, medium facility, large facility) in order to achieve the highest expected payoffoff of $_____. (Enter your response as a whole number.)
Expert Solution
Step 1: Correct Decision tree
Option (A): It contains all the nodes with decision nodes. Hence, option (A) is incorrect.
Option (B): Large facility cannot be expanded further. Hence, option (B) is incorrect.
Option (D): This decision tree does not shoe loss as a negative number. Hence, option(D) is incorrect.
Option (C): This decision tree is correct as it shows the chance node wherever applicable and shows loss wherever applicable.
Answer: Option (C)
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