Question:

A company operates in one city using a facility that has an annual operating cost of $250,000 and delivers an annual sales revenue of $300,000. Due to increasing population in the city, market research suggests that there will be market (demand) growth for the company's products. The company is considering three options in responding to the market growth in the city over the next four years period: Option 1 Keeping the current facility, and based on market research, the company would have three possible scenarios: - High growth market will increase the annual sales revenue to $375,000 - Medium growth market will increase the annual sales revenue to $345,000 - Low growth market will increase the annual sales revenue to $320,000 3 Option 2 Expanding the facility permanently, and based on the market research, the company would have three possible scenarios: - High growth market will increase the annual sales revenue to $500,000 - Medium growth market will increase the annual sales revenue to $425,000 - Low growth market will increase the annual sales revenue to $350,000 The cost for expanding the facility is $250,000, and the annual operating cost of the expanded facility will be 5% higher than the current facility. Option 3 Leasing a temporary facility to replace the current facility for a year at a cost of $65,000. The scenarios of the potential annual sales revenue and the operating cost for using the temporary facility are similar to expanding the facility permanently. For year 2 until year 4, the company can choose whether to operate with the current facility or to expand the facility permanently. The probabilities of the high, medium, and low growth of the market in the city over the four years period are 0.35, 0.40, and 0.25, respectively. Analyse the above scenario using a decision tree diagram based on the expected profits / loss generated over a four years period. The process of expanding the facility or leasing the temporary facility takes little time, so both the revenue and the operating cost can be applied immediately. For simplicity, assume no discounted values over the four years period. Explain your calculation in every node of the decision tree diagram, and recommend the best option that the company should take. Also, identify the best and worst possible scenarios in terms of profit or loss from the available options