The owner of a reputable computer store is considering what to do with his business over next five years. Sales growth over the past couple of years has been good, but sales could grow substantially if a major proposed electronics firm is built in his area. The owner of the computer stre sees three different options. Option 1: Enlarge his current store Option 2: Locate to a new site. Option 3: Simply wait and do nothing. The process of expanding or moving would take very little time, and therefore the store will not lose revenue during expanding or moving. If nothing were done the first year and strong growth occurred, then the decision to expand could be reconsidered. Waiting longer than one year would allow competition to move in and would make expansion no longer feasible. The assumptions and conditions are as follow: 1. Strong growth as a result of the increased population of computer fanatics from the new electronic firm has a 55% probability. 2. Strong growth with a new site would give annual returns of $195,000 per yar. Weak growth with a new site would mean annual return of $115,000. 3. Strong growth with an expansion would give annual returns of $190,000 per year. Weak growth with an expansion would mean annual returns of S100,000. 4. At the existing store with no changes, there would be returns of $115,000 per year if there is a strong growth and $105,000 per year if growth is weak. 5. Expansion at the current site would cost $87,000. 6. The move to the new site would cost $210,000. 7. If growth is strong and the existing site is enlarged during second year, the cost would still be $87,000. 8. Operating costs for all options are equal. 9. We are not required to incorporate time value of money. I.e., we don't use any interest rates or concepts of Present value or future value using interests. Help the owner of the computer store by reducing the risk in making the decision by performing decision tree analysis. Create the decision tree to evaluate all alternative with each decision node and chance node clearly shown and properly labeled. Then help the store owner to decide which alternative is the best using your decision tree analysis

The owner of a reputable computer store is considering what to do with his business over next five years. Sales growth over the past couple of years has been good, but sales could grow substantially if a major proposed electronics firm is built in his area. The owner of the computer stre sees three different options. Option 1: Enlarge his current store Option 2: Locate to a new site. Option 3: Simply wait and do nothing. The process of expanding or moving would take very little time, and therefore the store will not lose revenue during expanding or moving. If nothing were done the first year and strong growth occurred, then the decision to expand could be reconsidered. Waiting longer than one year would allow competition to move in and would make expansion no longer feasible. The assumptions and conditions are as follow: 1. Strong growth as a result of the increased population of computer fanatics from the new electronic firm has a 55% probability. 2. Strong growth with a new site would give annual returns of $195,000 per yar. Weak growth with a new site would mean annual return of $115,000. 3. Strong growth with an expansion would give annual returns of $190,000 per year. Weak growth with an expansion would mean annual returns of S100,000. 4. At the existing store with no changes, there would be returns of $115,000 per year if there is a strong growth and $105,000 per year if growth is weak. 5. Expansion at the current site would cost $87,000. 6. The move to the new site would cost $210,000. 7. If growth is strong and the existing site is enlarged during second year, the cost would still be $87,000. 8. Operating costs for all options are equal. 9. We are not required to incorporate time value of money. I.e., we don't use any interest rates or concepts of Present value or future value using interests. Help the owner of the computer store by reducing the risk in making the decision by performing decision tree analysis. Create the decision tree to evaluate all alternative with each decision node and chance node clearly shown and properly labeled. Then help the store owner to decide which alternative is the best using your decision tree analysis

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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