A trucking company has decided to replace its existing truck fleet. Supplier A will provide the needed trucks at a cost of $700,000. Supplier B will charge $500,000, but its vehicles may require more maintenance and repair than those from supplier A. The trucking company is also considering modernizing its maintenance and repair facility either by renovation or by renovation and expansion. Although expansion is generally more expensive than renovation alone, it enables greater efficiency of repair and therefore reduced annual operating costs of the facility. The estimated costs of renovation alone and of renovation and expansion, as well as the ensuing operating costs, depend on the quality of the trucks that are purchased and the extent of the maintenance that they require. The trucking company therefore has decided on the following strategy: purchase the trucks now, observe their maintenance requirements for 1 year, then make the decision as to whether to renovate or to renovate and expand. During the 1-year observation period, the company will get additional information about expected maintenance requirements during years 2 through 5.

Use decision tree analysis to determine the strategy that minimizes expected costs. 

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One-year maintenance requirements Low Moderate High Renovation costs $150,000 $200,000 $300,000 Renovation and expansion costs $300,000 $500,000 $700,000 Expected maintenance costs for years 2 through 5 can best be estimated after observ- ing the maintenance requirements for the first year (Table 17).