Brunel Engineering fabricates industrial ovens for hotels, schools, and restaurants. The company is planning to expand and export its products overseas. The current manual method of materials handling and assembly is inefficient.

Brunel is considering a one-year lease of an industrial robot to increase capacity and improve manufacturing efficiency. However, demand is uncertain and will depend on currency fluctuations and performance of the global economy. If demand for exports stays at the current level, the probability of which is 0.40, annual savings from utilizing the robot instead of paying wages to full-time employees will be £30,000. If demand rises, the robot will save £45,000 annually because of operating efficiencies in addition to new sales. Finally, if demand falls, the robot will result in an estimated annual loss of £60,000. The probability is estimated to be 0.35 for higher demand and 0.25 for lower demand.

a. If Brunel hires a full-time employee in place of the robot, annual payoffs will be £30,000 if demand is unchanged, £35,000 if demand rises, and -£30,000 if demand falls. Draw a decision tree for this problem.

b. Compute the expected value of the payoff for each alternative. Which is the best alternative, based on the expected values?