A firm must decide whether to construct a small, medium or large stamping plant. A consultant’s report indicates a 0.20 probability that demand will be low and 0.80 that demand will be high. If the firm builds a small facility and demand turns out to be low, the Net Present Value (NPV) will be $42M. If demand turns out to be high, the firm can either subcontract and realize the NPV of $42M or expand greatly for a Net Present Value of $48M. The firm could build a medium-size facility as a hedge: if demand turns out to be low, its NPV is estimated at $22M; if demand turns out to be high, the firm could do nothing and realize a NPV of $46M, or could expand and realize a NPV of $50M. If the firm builds a large facility and demand is low, the NPV will be ($20M), whereas high demand will result in a NPV of $72M. Analyze and solve this problem using a decision tree What is the Maximin Alternative and Compute the EVPI
A firm must decide whether to construct a small, medium or large stamping plant. A consultant’s report indicates a 0.20
probability that demand will be low and 0.80 that demand will be high.
If the firm builds a small facility and demand turns out to be low, the
demand turns out to be high, the firm can either subcontract and realize the NPV of $42M or expand greatly for a Net Present Value of $48M.
The firm could build a medium-size facility as a hedge: if demand turns out to be low, its NPV is estimated at
$22M; if demand turns out to be high, the firm could do nothing and realize a NPV of $46M, or could expand and realize a NPV of $50M.
If the firm builds a large facility and demand is low, the NPV will be ($20M), whereas high demand will result in a NPV of $72M.
- Analyze and solve this problem using a decision tree
- What is the Maximin Alternative and
- Compute the EVPI
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