The company has decided to build a second plant, as full capacity has been achieved by the present manufacturing unit. The second plant may be large or small, located at a nearby area and the demand may be low or high, while 0.3 is the probability for low demand. The small plant will have a present value of $ 8 million and large plant $ 5 million , for low demands. The small plant payoff with a present value of $ 10 million and the large plant at $ 18 million for a high demand scenario. The small plant could be expanded for a present value of $ 14 million , if the demand works out be high. A decision tree for this problem needs to be drawn. Concept Introduction: The measure of likelihood that an event will happen, in a random experiment is called probability.

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Chapter A, Problem 24P

(a)

Summary Introduction

Interpretation: The company has decided to build a second plant, as full capacity has been achieved by the present manufacturing unit. The second plant may be large or small, located at a nearby area and the demand may be low or high, while 0.3 is the probability for low demand. The small plant will have a present value of $8 million and large plant

$5 million , for low demands. The small plant payoff with a present value of $10 million and the large plant at $18 million for a high demand scenario. The small plant could be expanded for a present value of $14 million , if the demand works out be high. A decision tree for this problem needs to be drawn.Concept Introduction: The measure of likelihood that an event will happen, in a random experiment is called probability.

(b)

Summary Introduction

Interpretation: The company has decided to build a second plant, as full capacity has been achieved by the present manufacturing unit. The second plant may be large or small, located at a nearby area and the demand may be low or high, while 0.3 is the probability for low demand. The small plant will have a present value of $8 million and large plant $5 million , for low demands. The small plant payoff with a present value of $10 million and the large plant at $18 million for a high demand scenario. The small plant could be expanded for a present value of $14 million , if the demand works out be high. In order to achieve the highest expected payoff, the procedure done by the management needs to be derived.

Concept Introduction: The measure of likelihood that an event will happen, in a random experiment is called probability.

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