A chain of shops will have to decide whether to build small or large premises. The demand at a particular location may be small or large with respective probabilities of 0,4 and 0,6. If it builds a small-scale facility and the demand for the products is large, the manager of the company will have the choice to upgrade the facility or not to upgrade it. 

In case of upgrading the facilities the profit is estimated to be $270.000 while in case of not upgrading it is limited to $223.000. If he builds small facilities and demand is low there is no need to upgrade the facilities and the profit will be $200.000. If he erects large scale facilities and demand is low there are two options. 

Either do nothing or try to influence demand with proper advertising of the products. In the case of doing nothing a loss of $60.000 is expected. The response to the advertising may be limited with a profit of $20.000 with probability 0,3 or it may be very good such that it yields a profit of $220.000 with probability 0.7.

If large facilities are erected out of the ground and the demand for the products is high the profit is expected to be $800.000.

Request:

1. Design the Decision Tree

2. To analyze the tree by calculating the expected profit at each node

3. Choose the most appropriate decision. Justify your answer.

Answer rating: 100% (QA)

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