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.) Choose the correct decision tree below. Note that each payoff is given in thousands (S000)OB.OA.Expand to g s175High 0 25 s180Avg 0.35 $80High 0 25Avg 0.35 s80Low 0.40-S7ODo nothing$125- $70High 0 25 s180Avg 0 35 s100Low 0.40Low 0.40Expand to Irg s175-$70LargeLargeHigh 0 25Avg 0.35 s100Do nothing$125Expand to irg s100Expand to mede50-$50Low 0 40- $50Expand to IrgExpand to medesoDo nothingExpand to medeanDo nothing$100High 0 25High 0.25Do nothing$25Expand to mede"$30Do nothingSmallSmallAvg 0 35Low 0 40 513$25Avg 0.35Low 0.40 $13$30-$13$15$15OD.OC.High 0.40 5180Avg 0.35 s80High 0 25 s180Avg 0 35 s80Low 0252029 570Expand to g s175Expand to Irg S175LargeHigh 0.40hledAvg 0.35 s100Low 025 s50Low 0.40Large-$70Do nothing s125High 0 25hvedAvg 0.35 s100Expand to Irg S100$100Expand to medg50Do nothingDo nothing$125Low 0.40High 0.40$50Expand to Irgs100Expand to medg50SmallHigh 0.25$25Expand to medAvg 0.35Low 0 25 513SmallDo nothing$25Expand to meds30Do nothing$15Avg 0.35Low 0.40 $13Do nothing$15What should management do to achieve the highest expected payoff?in order to achieve the highest expected payoff of S (Enter your response as a whole number)The management should build a Amanager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilties being 0.40, 0.35, and 0 25, respectivelyA small facility is expected to ean 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 eam a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can beexpanded to medium size to eam $50,000 or to large size to eam $100,000.AA medium-sized facility is expected to lose an estimated $50,000 if demand is low and eam $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 $175,000If 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 S70,000.Choose the correct decision tree below. Note that each payoff is given in thousands (S000).O AOB.High 0 25Avg 0.35 580Expand to g S175Do nothingHigh 0.25 s180$125Avg 0.35$80Low 0.40 -S70Low 0.40Expand to lrg S175- $70High 0 25 5180MedAvg 0.35LargeLargeHigh 0 25Avg 0.35 $100$100Low 0.40/MeDo nothing$125Expand to Irg$100Expand to medeso"$50Low 0.40-$50-$50Expand to IrgS100Expand to meds50High 0.25High 0.25Do nothing$25Expand to mede30SmallSmallDo nothing$25Expand to medAvg 035Low 0 40 s13Do nothingAvg 0 35$13$302415Low 0 40s1Do nothing$15OD.OC.High 0.25 s180Avg 0 35 s80$80Low 0.40High 0 40 s180Avg 0.35 s80LOw 025 570Expand to irgs175LargeExpand to ig $175High 0 40$70Do nothingMedAvg 0 35s100$125Expand to g s100Expand to medes0LargeHigh 0 25hted Avg 0.35 s100Low 0.40$100Low 025 s50$50Do nothing$125High 0.40"S50$25Expand to medean$430-$50Expand to IrgS100SmallDo nothingExpand to medg50Do nothing$25Expand to meds30High 0.25Avg 0 35SmallNextAvg 0.351210 AM33F Clear AODa C2/2022

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.)

Choose the correct decision tree below. Note that each payoff is given in thousands (S000)
OB.
OA.
Expand to g s175
High 0 25 s180
Avg 0.35 $80
High 0 25
Avg 0.35 s80
Low 0.40-S7O
Do nothing
$125
- $70
High 0 25 s180
Avg 0 35 s100
Low 0.40
Low 0.40
Expand to Irg s175
-$70
Large
Large
High 0 25
Avg 0.35 s100
Do nothing
$125
Expand to irg s100
Expand to mede50
-$50
Low 0 40
- $50
Expand to Irg
Expand to medeso
Do nothing
Expand to medean
Do nothing
$100
High 0 25
High 0.25
Do nothing
$25
Expand to mede
"$30
Do nothing
Small
Small
Avg 0 35
Low 0 40 513
$25
Avg 0.35
Low 0.40 $13
$30
-$13
$15
$15
OD.
OC.
High 0.40 5180
Avg 0.35 s80
High 0 25 s180
Avg 0 35 s80
Low 025
2029 570
Expand to g s175
Expand to Irg S175
Large
High 0.40
hledAvg 0.35 s100
Low 025 s50
Low 0.40
Large
-$70
Do nothing s125
High 0 25
hvedAvg 0.35 s100
Expand to Irg S100
$100
Expand to medg50
Do nothing
Do nothing
$125
Low 0.40
High 0.40
$50
Expand to Irg
s100
Expand to medg50
Small
High 0.25
$25
Expand to med
Avg 0.35
Low 0 25 513
Small
Do nothing
$25
Expand to meds30
Do nothing
$15
Avg 0.35
Low 0.40 $13
Do nothing
$15
What should management do to achieve the highest expected payoff?
in order to achieve the highest expected payoff of S (Enter your response as a whole number)
The management should build a

Amanager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilties being 0.40, 0.35, and 0 25, respectively
A small facility is expected to ean 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 eam 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 eam $50,000 or to large size to eam $100,000.
A
A medium-sized facility is expected to lose an estimated $50,000 if demand is low and eam $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 S70,000.
Choose the correct decision tree below. Note that each payoff is given in thousands (S000).
O A
OB
.
High 0 25
Avg 0.35 580
Expand to g S175
Do nothing
High 0.25 s180
$125
Avg 0.35
$80
Low 0.40 -S70
Low 0.40
Expand to lrg S175
- $70
High 0 25 5180
MedAvg 0.35
Large
Large
High 0 25
Avg 0.35 $100
$100
Low 0.40
/Me
Do nothing
$125
Expand to Irg
$100
Expand to medeso
"$50
Low 0.40
-$50
-$50
Expand to Irg
S100
Expand to meds50
High 0.25
High 0.25
Do nothing
$25
Expand to mede30
Small
Small
Do nothing
$25
Expand to med
Avg 035
Low 0 40 s13
Do nothing
Avg 0 35
$13
$30
2415
Low 0 40
s1
Do nothing
$15
OD.
OC.
High 0.25 s180
Avg 0 35 s80
$80
Low 0.40
High 0 40 s180
Avg 0.35 s80
LOw 025 570
Expand to irg
s175
Large
Expand to ig $175
High 0 40
$70
Do nothing
MedAvg 0 35
s100
$125
Expand to g s100
Expand to medes0
Large
High 0 25
hted Avg 0.35 s100
Low 0.40
$100
Low 025 s50
$50
Do nothing
$125
High 0.40
"S50
$25
Expand to med
ean
$430
-$50
Expand to Irg
S100
Small
Do nothing
Expand to medg50
Do nothing
$25
Expand to meds30
High 0.25
Avg 0 35
Small
Next
Avg 0.35
1210 AM
33F Clear AODa C
2/2022

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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