A Pacific Northwest lumber company is considering the expansion of one of its mills. The question is whether to do it now, or wait for one year and re-consider. If they expand now, the major factors of importance are the state of the economy and the level of interest rates. The combination of these two factors results in five possible situations. If they do not expand now, only the state of the economy is important and three conditions characterize the possibilities. The following table summarizes the situation:

		Probabilities	Revenues
Expand
very favorable	.2			$79,000
favorable	.2			$59,000
neutral	.1			$22,000
unfavorable	.3			-$21,000
very unfavorable	.2			-$32,000
Don't expand
expansion	.2			$49,000
steady	.5			$28,000
contraction	.3			$8,000

Required

a. Draw the decision tree for this problem.

b. What is the expected value for expanding?

c. What is the expected value for not expanding?

d. Based on expected value, what should the company's decision(s) be?

Answer rating: 100% (QA)

b Calculation of the expected Value for Expanding Expected Value 02 79000 02 59000 01 22000 03 21000 ... View the full answer