QUESTION TWO (a) A large steel manufacturing company has three options with regard to production: (1) Produce commercially (2) Build pilot plant (3) Stop producing steel The management has estimated that their pilot plant, if built has 0.8 chance of high yield and 0.2 chance of low yield. If the pilot plant does show a high yield, management assigns a probability of 0.75 that the commercial plant will also hav
QUESTION TWO
(a)
A large steel manufacturing company has three options with regard to production: (1) Produce commercially (2) Build pilot plant (3) Stop producing steel
The management has estimated that their pilot plant, if built has 0.8 chance of high yield and 0.2 chance of low yield. If the pilot plant does show a high yield, management assigns a probability of 0.75 that the commercial plant will also have a high yield. If the pilot plant shows a low yield, there is only a 0.1 chance that the commercial plant will show a high yield. Finally, management’s best assessment of the yield on a commercial size plant without building a pilot plant first has 0.6 chance of high yield. A pilot plant will cost $300,000. The profits earned under high and low yield conditions are $12,000,000 and $1,200,000 respectively.
i.
Draw up an appropriate decision tree for the steel manufacturing company
ii. What is the company’s best strategy under EMV approach?
Step by step
Solved in 2 steps with 2 images
