A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively.

A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to average size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to average size to earn $60,000 or to large size to earn $125,000.

A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average if demand is high the medium-sized facility is expected to earn a net present value of $150,000: it can be expanded to a large size for a net payoff of $145,000.

If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the large facility, the present value is expected to be $ 125,000; if demand is low, the facility is expected to lose $60,000.

a. Draw a decision tree for this problem.

b. What should management do to achieve the highest expected payoff?