Question: Expando Inc is considering the possibility of building an additional
Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $ 6 million. If demand for new products is low, the company expects to receive $ 10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $ 12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $ 9 million. Were demand to be low, the company would expect $ 10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $ 14 million. In either case, the probability of demand being high is .40, and the probability of it being low is .60. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision.
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