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 $12,000 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 $50,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $70,000 or to large size to earn $135,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $90,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $100,000; it can be expanded to a large size for a net payoff of $125,000. If a large facility is built and demand is high, earnings are expected to be $160,000. 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 S70,000. Which alternative is best according to each of the following decision criterion? (Enter your responses as whole numbers.) Criterion Decision Value of Return a. Maximin thousand b. Maximax thousand c. Minimax regret thousand
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 $12,000 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 $50,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $70,000 or to large size to earn $135,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $90,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $100,000; it can be expanded to a large size for a net payoff of $125,000. If a large facility is built and demand is high, earnings are expected to be $160,000. 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 S70,000. Which alternative is best according to each of the following decision criterion? (Enter your responses as whole numbers.) Criterion Decision Value of Return a. Maximin thousand b. Maximax thousand c. Minimax regret thousand
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
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Transcribed Image Text: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 $12,000 if demand is low. If demand is average, the small facility is expected to earn $15,0003;
it can be increased to medium size to earn a net present value of $50,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to
medium size to earn $70,000 or to large size to earn $135,000.
A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $90,000 if demand is average. If demand is high, the medium-sized
facility is expected to earn a net present value of $100,000; it can be expanded to a large size for a net payoff of $125,000.
If a large facility is built and demand is high, earnings are expected to be $160,000. 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.
Which alternative is best according to each of the following decision criterion? (Enter your responses as whole numbers.)
Criterion
Decision
Value of Return
a. Maximin
$
thousand
b. Maximax
$
thousand
c. Minimax regret
$4
thousand
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