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 realize a profit of $ 750,000. If the process is unsuccessful, his company will realize a loss of $ 900,000. Steve estimates the probability of the full scale process succeeding is 65%. Steve has the option to construct a pilot plant for $ 60,000 to test the new process before deciding to build the full scale facility. From prior experience, Steve knows that there is an 81% probability that the pilot plant will be successful if the new facility proves to be successful. Likewise, there is a 16% probability that the pilot plant will be successful if the new facility proves to be unsuccessful.
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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