Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three options.The first is a small facility that it could buld at a cost of $6 million. If demand for new products is low, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 milion. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million.The third option is to outsource their production, it would cost them nothing The company would expect to receive $1.6 million in discounted revenues if the demand was low and $3.1 milion if the demand was high.if you know that the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision among the three proposed options only. The company is currently considering three options Select the correct statements from the following statements only? The expected value from option 3 is equal to 22 million.
Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three options.The first is a small facility that it could buld at a cost of $6 million. If demand for new products is low, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 milion. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million.The third option is to outsource their production, it would cost them nothing The company would expect to receive $1.6 million in discounted revenues if the demand was low and $3.1 milion if the demand was high.if you know that the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision among the three proposed options only. The company is currently considering three options Select the correct statements from the following statements only? The expected value from option 3 is equal to 22 million.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Expando, Inc, is considering the possibility of building an additional factory that would produce a new addition to their product line.
The company is currently considering three options.The first is a small facility that it could build at a cost of $6 million. If demand for
new products is tow, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the
small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second
option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in
discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14
million.The third option is to outsource their production, it would cost them nothing. The company would expect to receive $1.6
million in discounted revenues if the demand was low and $3.1 million if the demand was high.if you know that the probability of
demand being high is 0.40, and the probability of it being low is 0.60.Not constructing a new factory would result in no additional
revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help
Expando make the best decision among the three proposed options only. The company is currently considering three options. Select
the correct statements from the following statements only?
A The expected value from option 3 is equal to 2.2 million.
B) The expected net profit from option 2 is higher than 1 and 3, hence it is it best option.
If the probabilities change to 50% high, 50% low, the best options remains the same.
D The expected net profit from option 1 is higher than 2 and 3, hence it is it best option.
E The expected value from option 1 is equal to 3.2 million.
The expected value from option 2 is equal to 3.6 million.
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