Business

Operations ManagementQ&A LibraryBrandon is considering expansion of a store. If he expands, the interest rate at which he borrows the money is the important factor. He is not sure what kind of interest rate will be obtained. If he does not expand, the only factor influencing the outcome is future economy. The following table summarizes the situation: Probabilities Payoff Expand Large Favorable interest .3 $60k Neutral interest .5 $30k Unfavorable interest .2 ‑$70k Expand Small Favorable interest .3 $50k Neutral interest .5 $30k Unfavorable interest .2 ‑$30k Do not expand Economy up .3 $30k Economy same .5 $20k Economy down .2 $0 Draw the decision tree showing all nodes and expected values. Use square for decision node, and circle for chance node. What should he do?Question

- Brandon is considering expansion of a store. If he expands, the interest rate at which he borrows the money is the important factor. He is not sure what kind of interest rate will be obtained. If he does not expand, the only factor influencing the outcome is future economy. The following table summarizes the situation:

Probabilities Payoff

*Expand Large* Favorable interest .3 $60k

Neutral interest .5 $30k

Unfavorable interest .2 ‑$70k

*Expand Small* Favorable interest .3 $50k

Neutral interest .5 $30k

Unfavorable interest .2 ‑$30k

* *

*Do not expand* Economy up .3 $30k

Economy same .5 $20k

Economy down .2 $0

Draw the decision tree showing all nodes and expected values. Use square for decision node, and circle for chance node. What should he do?

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