ABC Inc is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering 2 options. The first is a small facility that could build be built at a cost of $6million. If demand for the new product is low, the company expects to receive $10million in discounted revenues(present value of future revenues) with the small building. On the other hand, if demand is high, it expects $12million in discounted revenues using the small building.The second option is to build a large facility at a cost of $9million. If the demand were to low, the company would expect $10million in discounted revenues with the large building. If demand is high, the company estimates that the discounted revenues would be $14million. In either case, the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new facility would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help ABC make the best decision. What is the best decision?

ABC Inc is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering 2 options. The first is a small facility that could build be built at a cost of $6million. If demand for the new product is low, the company expects to receive $10million in discounted revenues(present value of future revenues) with the small building. On the other hand, if demand is high, it expects $12million in discounted revenues using the small building.The second option is to build a large facility at a cost of $9million. If the demand were to low, the company would expect $10million in discounted revenues with the large building. If demand is high, the company estimates that the discounted revenues would be $14million. In either case, the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new facility would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help ABC make the best decision. What is the best decision?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 46P

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