Juicy-Juice Ltd. is planning to increase its juice supply for the fiscal year 2021 – 2022. With the expected increase in demand, it is projected that there is a need for additional space. Management must decide whether to rent a large building or construct a medium factory space. If they rent a large building and the demand is low, the net present value after deducting for building costs will be $230,000. If the demand is high, the company can continue using the old factory or rent an additional building to meet the current need. Renting an additional building would have a net present value of $301,000 and using the old factory would have a net present value of $530,000. The probability of high demand is 0.45 while the probability of low demand is 0.55. If a medium factory was constructed and the demand is high, the estimated net present value is $320, 000. If the demand is moderate, the net present value is $195, 000. If the demand turns out to be low, the net present value will be (300,000). The probability that the demand will be high, moderate, or low is estimated to be 0.50, 0.25 and 0.25, respectively. (i) Draw the decision tree to represent the above information. (ii) Calculate the expected values of each course of action. (iii) Using the result from (ii) decide which course of action the Juicy-Juice management team should take.
Juicy-Juice Ltd. is planning to increase its juice supply for the fiscal year 2021 – 2022. With the expected increase in demand, it is projected that there is a need for additional space. Management must decide whether to rent a large building or construct a medium factory space.
If they rent a large building and the demand is low, the
If a medium factory was constructed and the demand is high, the estimated net present value is $320, 000. If the demand is moderate, the net present value is $195, 000. If the demand turns out to be low, the net present value will be (300,000). The probability that the demand will be high, moderate, or low is estimated to be 0.50, 0.25 and 0.25, respectively.
(i) Draw the decision tree to represent the above information.
(ii) Calculate the expected values of each course of action.
(iii) Using the result from (ii) decide which course of action the Juicy-Juice management team should take.
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