A manager of the Schumacher & Company's Retail Division in Asia is trying to decide whether to build a small, medium, or large facility in Japan. Demand can be low, medium, or high, with the estimated probabilities being 0.30, 0.50 and 0.20, respectively. a) A small facility is expected to earn an after-tax net present value of just $2,500,000 if demand is low. If demand is average, the small facility is expected to earn $8,500,000; but it can be increased to average size to earn a net present value of $7,000,000. If demand is high, the small facility is expected to earn $10,000,000; but it can be increased to average size to earn a net present value of $11,000,000, or to large size to earn a net present value of $14,000,000. A medium-sized facility is expected to lose an estimated $3,000,000 if demand is low and earn $18,000,000 if demand is average. If demand is high, the medium-sized facility is expected to earn $17,000,000; but it can be expanded to a large size for a net payoff of $19,000,000. If a large facility is built and demand is high, earnings are expected to be $26,000,000. If demand is average for the large facility, the present value is expected to be $15,000,000; if demand is low, the facility is expected to lose $8,000,000. Draw a decision tree for this problem in Excel (or on paper, then take cell phone picture, and attach). What should management do to achieve the highest expected payoff?
A manager of the Schumacher & Company's Retail Division in Asia is trying to decide whether to build a small, medium, or large facility in Japan. Demand can be low, medium, or high, with the estimated probabilities being 0.30, 0.50 and 0.20, respectively. a) A small facility is expected to earn an after-tax net present value of just $2,500,000 if demand is low. If demand is average, the small facility is expected to earn $8,500,000; but it can be increased to average size to earn a net present value of $7,000,000. If demand is high, the small facility is expected to earn $10,000,000; but it can be increased to average size to earn a net present value of $11,000,000, or to large size to earn a net present value of $14,000,000. A medium-sized facility is expected to lose an estimated $3,000,000 if demand is low and earn $18,000,000 if demand is average. If demand is high, the medium-sized facility is expected to earn $17,000,000; but it can be expanded to a large size for a net payoff of $19,000,000. If a large facility is built and demand is high, earnings are expected to be $26,000,000. If demand is average for the large facility, the present value is expected to be $15,000,000; if demand is low, the facility is expected to lose $8,000,000. Draw a decision tree for this problem in Excel (or on paper, then take cell phone picture, and attach). What should management do to achieve the highest expected payoff?
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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Transcribed Image Text:A manager of the Schumacher & Company's Retail Division in Asia is trying to decide whether to build a smallI, medium, or large facility in Japan.
Demand can be low, medium, or high, with the estimated probabilities being 0.30, 0.50 and 0.20, respectively.
a) A small facility is expected to earn an after-tax net present value of just $2,500,000 if demand is low.
If demand is average, the small facility is expected to earn $8,500,000; but it can be increased to average size to earn a net
present value of $7,000,000.
If demand is high, the small facility is expected to earn $10,000,000; but it can be increased to average size to earn a net
present value of $11,000,000, or to large size to earn a net present value of $14,000,000.
A medium-sized facility is expected to lose an estimated $3,000,000 if demand is low and earn $18,000,000 if demand is average.
If demand is high, the medium-sized facility is expected to earn $17,000,000; but it can be expanded to a large size for a net
payoff of $19,000,000.
If a large facility is built and demand is high, earnings are expected to be $26,000,000. If demand is average for the large facility, the
present value is expected to be $15,000,000; if demand is low, the facility is expected to lose $8,000,000.
Draw a decision tree for this problem in Excel (or on paper, then take cell phone picture, and attach).
What should management do to achieve the highest expected payoff?
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