firm plans to expand its product line and faces a dilemma whether to build a small or large facility to produce new products. If it builds a small facility and demand is low, the NPV after deducting for building costs will be four hundred thousand pesos. If demand is high, the firm can either maintain the small facility or expand it. Expansion would have an NPV of four hundred fifty pesos while maintaining the small facility would have an NPV of fifty thousand pesos. If a large facility is built and demand is high, the estimated NPV would be eight hundred thousand pesos. If demand turns out to be low, the NPV would be a loss of ten thousand. The probability that the demand is high is estimated to be sixty percent. a. Analyze using a decision tree. b. Compute for EVPI. c. Determine the range over which each alternative would be best in terms of the value when demand is low.

firm plans to expand its product line and faces a dilemma whether to build a small or large facility to produce new products. If it builds a small facility and demand is low, the NPV after deducting for building costs will be four hundred thousand pesos. If demand is high, the firm can either maintain the small facility or expand it. Expansion would have an NPV of four hundred fifty pesos while maintaining the small facility would have an NPV of fifty thousand pesos. If a large facility is built and demand is high, the estimated NPV would be eight hundred thousand pesos. If demand turns out to be low, the NPV would be a loss of ten thousand. The probability that the demand is high is estimated to be sixty percent. a. Analyze using a decision tree. b. Compute for EVPI. c. Determine the range over which each alternative would be best in terms of the value when demand is low.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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