A company has developed a promising new product and examines the following three alternatives of manufacturing. Alternative No. 1 is to buy a semi-automatic machine with an initial cost of €130,000, alternative No. 2 is to buy a full automatic machine with an initial cost of €180,000, while alternative No. 3 is to outsource production (buy). With alternative No. 1, there is a 75 percent chance that 80 out of each 100 products will produced without defects and a 25 percent chance that 70 out of each 100 products will produced without defects. With alternative No. 2, there is an 85 percent chance that 90 out of each 100 products will produced without defects and a 15 percent chance that 80 out of each 100 products will produced without defects. With alternative No. 3, there is a 60 percent chance that 70 out of each 100 products will produced without defects and a 40 percent chance that there is about 50:50 chance the non-defective will be produced. The company operates on a 12 months basis with a monthly production of 6,000 units. The price per unit has been estimated to be €12 based on a production cost of €8. Draw a decision tree to reflect the three alternatives, calculate the payoff associated with each, and point the alternative with the greatest EMV.

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Decision tree calculates profits for 3 options and then ... View the full answer