$9$:$18$

$5$G

Done

srod.instructure.com

$AA$

$-=$

$59$:$47$

Time

Remaining

Return

$1$

$20$ points

A firm must decide whether to construct a small, medium, or large stamping plant. A consultant's report indicates a $0\mathrm{.}6$ probability that demand will be low and an $0\mathrm{.}4$ probability that demand will be high. If the firm builds a small facility and demand turns out to be low, the net present value will be $$20$ million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $$40$ million or expand greatly for a net present value of $$50$ million. The firm could build a mediumsize facility as a hedge: If demand turns out to be low, its net present value is estimated at $$10$ million; if demand turns out to be high, the firm can either subcontract and realize a net present value of $$45$ million, or it could expand and realize a net present value of $$60$ million.

If the firm builds a large facility and demand is low, the net present value will be $-$$$20$ million, whereas high demand will result in a net present value of $$78$ million. Analyze this problem using a decision tree.

Demand $($Probability $\%)$