Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 million. If demand for new products is low, the company expects to receive $10 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. In either case, the probability of demand being high is 40, and the probability of it being low is .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. (Answer in Appendix E)
Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 million. If demand for new products is low, the company expects to receive $10 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. In either case, the probability of demand being high is 40, and the probability of it being low is .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. (Answer in Appendix E)
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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I need assitance with solving Chapter 5 Question 8. I made numerous attempts to solve. however I am still having issues. Please provide a step by step explanation so, I can use it as notes for future reference. Respectfully thank you.
Transcribed Image Text:Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options:
1. **Small Facility**:
- **Cost**: $6 million.
- **Low Demand**: Expected to receive $10 million in discounted revenues (present value of future revenues).
- **High Demand**: Expected to receive $12 million in discounted revenues.
2. **Large Factory**:
- **Cost**: $9 million.
- **Low Demand**: Expected to receive $10 million in discounted revenues.
- **High Demand**: Expected to receive $14 million in discounted revenues.
### Demand Probabilities
- The probability of demand being high: 0.40.
- The probability of demand being low: 0.60.
Not constructing a new factory would result in no additional revenue, as current factories cannot produce these new products.
**Task**: Construct a decision tree to help Expando make the best decision.
(See Appendix E for the answer.)
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