The Hard to Beat Bakery is deciding whether to buy or repair an existing oven that they have been using for over 8 years. If they elect to repair, it will cost the entity $950,000 and either of two outcomes is likely: 1. A 20% probability it will perform okay and generate revenues of $10,000,000, or 2. An 80% chance that it will be partially restored and generate revenue of $2,000,000. If on the other hand however, they purchase a new oven, they can either buy an imported oven for $3,500,000 or they can buy a locally made one for $2,200,000. If the elect to purchase the imported oven, production will earn them revenues of $15,550,000, but if they buy the locally made oven, there is a 70% likelihood that it perform as expected and generate revenues of $12,000,000; and a 30% chance that it will not and generate revenues of $6,000,000. Required: 1. Draw a decision tree of this problem and determine the expected value. 2. Advise the management of the Bakery on how to proceed. 3. Briefly discuss the benefits of using decision trees.

The Hard to Beat Bakery is deciding whether to buy or repair an existing oven that they have been using for over 8 years. If they elect to repair, it will cost the entity $950,000 and either of two outcomes is likely: 1. A 20% probability it will perform okay and generate revenues of $10,000,000, or 2. An 80% chance that it will be partially restored and generate revenue of $2,000,000. If on the other hand however, they purchase a new oven, they can either buy an imported oven for $3,500,000 or they can buy a locally made one for $2,200,000. If the elect to purchase the imported oven, production will earn them revenues of $15,550,000, but if they buy the locally made oven, there is a 70% likelihood that it perform as expected and generate revenues of $12,000,000; and a 30% chance that it will not and generate revenues of $6,000,000. Required: 1. Draw a decision tree of this problem and determine the expected value. 2. Advise the management of the Bakery on how to proceed. 3. Briefly discuss the benefits of using decision trees.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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