Question

Steve is the director of operations for Diamond Chemical Company. The company is considering whether to launch a new product line, which will require building a new facility. The research required to produce the new product has not been proven to work in a full scale operation. If Steve decides to build the new facility and the process is successful, Diamond Chemical will earn a profit of $ 750,000. If the process is unsuccessful, his company will realize a loss of $ 900,000. Steve estimates that the probability of the full scale process succeeding is 65%. Steve has the option of constructing a pilot plant for $ 60,000 to test the new process before deciding to build the full scale facility. He estimates there is a 58% probability that the pilot plant will prove successful. If the pilot plant succeeds, he thinks the chance of the full scale facility succeeding is 90%. If the pilot plant fails, he thinks the chance of the full scale facility succeeding is only 30%.
a. Structure this problem with a decision tree and advise Steve what to do.
b. What is the most Steve should pay to construct the pilot plant?



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  • CreatedJuly 29, 2015
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