A manager is trying to decide whether to build a small, medium or large facility. Demandcan be low, average or high, with the estimated probabilities being 0.25, 0.40 and 0.35,respectively.A small facility is expected to earn an after-tax net present value of just $18,000 ifdemand is low. If demand is average, the small facility is expected to earn $75,000; it canbe increased to medium size to earn a net present value of $60,000. If demand is high, thesmall facility is expected to earn $75,000 and can be expanded to medium $60,000 orlarge to earn $125,000.A medium-sized facility is expected to lose an estimated $25,000 if demand is low andearn $140,000 if demand is average. If demand is high, the medium-sized facility isexpected to earn a net present value of $150,000; it can be expanded to a large size for anet payoff of $145,000.If a large facility is build and demand is high, earnings are expected to be $220,000. Ifdemand is average for the large facility, the present value is expected to be $125,000; ifdemand is low, the facility is expected to lose $60,000.a) Draw a decision tree for this problem.b) What should management do to achieve the highest expected payoff?

Decision Analysis is used to choose from different alternatives. In case of uncertainty, there are…

A manager is trying to decide whether to build a small, medium or large facility. Demand can be low, average or high, with the estimated probabilities being 0.25, 0.40 and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium $60,000 or large to earn $125,000.

A manager is trying to decide whether to build a small, medium or large facility. Demand can be low, average or high, with the estimated probabilities being 0.25, 0.40 and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium $60,000 or large to earn $125,000.

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

See similar textbooks

Similar questions

A manager is trying to decide whether to build a small,medium, or large facility. Demand can be low, average,or high, with the estimated probabilities being 0.25, 0.40,and 0.35, respectively.A small facility is expected to earn an after-tax net pres-ent value of just $18,000 if demand is low. If demand isaverage, the small facility is expected to earn $75,000; it canbe increased to medium size to earn a net present value of$60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn$60,000 or to large size to earn $125,000.A medium-sized facility is expected to lose an estimated$25,000 if demand is low and earn $140,000 if demand isaverage. If demand is high, the medium-sized facility isexpected to earn a net present value of $150,000; it can beexpanded to a large size for a net payoff of $145,000.If a large facility is built and demand is high, earningsare expected to be $220,000. If demand is average for thelarge facility, the…
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn 75,000 and can be expanded to medium size to earn $60,000 or to large size to earn $125,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000. If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the…
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn $60,000 or to large size to earn $125,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000. If a large facility is built and demand is high, earningsare expected to be $220,000. If demand is average for the large…
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40, 0.35, and 0.25, respectively. A small facility is expected to earn an after-tax net present value of just $13,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $50,000 or to large size to earn $100,000. A medium-sized facility is expected to lose an estimated $50,000 if demand is low and earn $100,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $125,000; it can be expanded to a large size for a net payoff of $175,000. If a large facility is built and demand is high, earnings are expected to be $180,000. If demand is average for the large…
A manager is trying to decide whether to build a small, medium or large facility. Demand can be low, average, or hit, with the estimated probabilities being 0.25, 0.40, and 0.35 respectively A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn $60,000 or large to earn $125,000. A medium-size facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-size facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000. If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the large facility,…
A manager is trying to decide whether to build a small, medium or large facility. Demand can be low, average, or hit, with the estimated probabilities being 0.25, 0.40, and 0.35 respectively A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn $60,000 or to large to earn $125,000. A medium-size facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-size facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000. If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the large facility,…
A firm must decide whether to construct a small, medium, or large stamping plant. A consultant’sreport indicates a .20 probability that demand will be low and an .80 probability that demand willbe high.If the firm builds a small facility and demand turns out to be low, the net present value will be$42 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $42 million or expand greatly for a net present value of $48 million.The firm could build a medium-size facility as a hedge: If demand turns out to be low, its netpresent value is estimated at $22 million; if demand turns out to be high, the firm could do nothingand realize a net present value of $46 million, or it could expand and realize a net present value of$50 million.If the firm builds a large facility and demand is low, the net present value will be – $20 million,whereas high demand will result in a net present value of $72 million.a. Analyze this problem using a decision…
A firm must decide whether to construct a small, medium, or large stamping plant. A consultant’s report indicates a 0.20 probability that demand will be low and a 0.80 probability that demand will be high. If the firms builds a small facility and demand turns out to be low, the net present value will be $42 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of S$42 million or expand greatly for a net present value of $48 million. The firm could build a medium size facility as a hedge: if demand turns out to be low, its net present value is estimated at $22 million; if demand turns out to be high, the firm could do nothing and realize a net present value of $46 million, or it could expand and realize a net present value of $50 million. If the firm builds a large facility and demand is low, the net present value will be -$20 million, whereas high demand will result in a net present value of $72 million. Analyze and prepare a…
The manager of Arbor, Incorporated, is considering raising its current price of $50 per unit by 10%. If she does so, she estimates that demand will decrease by 30,000 units per month. Arbor currently sells 100,000 units per month, each of which costs $35 in variable costs. Fixed costs are $1,200,000. Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase?
The annual sales of Crimson Pharmacy are expected to be given by S = 2.3 + 0.5t million dollars t years from now, whereas the annual sales of Cambridge Pharmacy are expected to be given by S = 1.2 + 0.9t million dollars t years from now. When will Cambridge's annual sales first surpass Crimson's annual sales?years from now
A firm is weighing three capacity alternatives: small, medium, and large job shop.Whatever capacity choice is made, the market for the firm’s product can be “moderate”or “strong.” The probability of moderate acceptance is estimated to be 40%; strongacceptance has a probability of 60%. The payoffs are as follows. Small job shop,moderate market = $24,000; Small job shop, strong market = $54,000. Medium job shop,moderate market = $20,000; medium job shop, strong market = $64,000.Large job shop,moderate market = -$2,000; large job shop, strong market = $96,000. Which capacitychoice should the firm make?
The annual sales of Crimson Pharmacy are expected to be given by S = 2.5 + 0.4t million dollars t years from now, whereas the annual sales of Cambridge Pharmacy are expected to be given by S = 1.2 + 0.8t million dollars t years from now. When will Cambridge's annual sales first surpass Crimson's annual sales?