Al-Andalus retail store in Saudi Arabia wants to decide on whether to build a large or a small store in the city of Dammam. The expected net present value of the return per month of the decision will depend on the future demand, which is expected to be either low with a probability of 0.4 or high with a probability of 0.6.
If a small store is built and demand happens to be low, the expected net present value will be SAR 200,000. However, if a small store is built and the demand is high, the management might decide whether to maintain the current size with expected net present value of SAR 250,000 or to expand. If the management chooses to expand, there is a 50% chance that the net present value will be SAR 350,000 and a 50% chance that the estimated net present value will be SAR 210,000.
If the management decides to build a large store and demand happens to be high, the net present value is estimated to be SAR 800,000. However, if a large store is built and the demand turns out to be low, the choice is to do nothing with a net present value of SAR 40,000 or to stimulate demand through local advertising. The response to advertising can be either moderate with a probability of 0.3 and net present value of SAR 80,000, or favorable with a probability of 0.7 and net present value of SAR 400,000.
Use a decision tree to help the management decide on the best alternative.