Explanation Given information: Person R has to decide whether to build a new state-of-the-art processing facility. It would result in the profit of $200,000, if it works and the loss is $180,000, if it does not work. It has a 60% chance to fail. Another option is to build a pilot plant and then decide. There is 50 percent chance that the pilot plant will work. It would cost $10,000. If the pilot works, the facility would work for 90%. If the pilot fails, the facility would work for 20%. The decision tree is as follows: In the below figure, all the values are in $1,000. Determine the profit or loss: If the pilot works and Person R builds the plant: It is calculated by adding the profit (if plant works), and the loss (if the plant fails). Profit = Plant works + Plant fails = [ ( $ 200 , 000 − $ 10 , 000 ) × 90 % ] + [ ( − $ 180 , 000 − $ 10 , 000 ) × 10 % ] = ( 190 , 000 × 90 % ) + ( − 190 , 000 × 10 % ) = $ 171 , 000 + ( − $ 19 , 000 ) = $ 152 , 000 If the pilot fails and Person R builds the plant: It is calculated by adding the profit (if the plant works) and the loss (if the plant fails)

11th Edition

ISBN: 8220103630726

Author: RENDER

Publisher: PEARSON

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Chapter A, Problem 21P

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To determine: The decision tree for the given situation.

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Chapter A, Problem 20P

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The decision tree for the given situation.

Solution Summary: The author explains how to determine the decision tree for the given situation. Person R must decide whether to build a new state-of-the-art processing facility.

To determine: The decision tree for the given situation.

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