A firm must decide whether to construct a small, medium, or large stamping plant. A consultant's report indicates a 0.65 probability that demand will be low and a 0.35 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 $25 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $26 million or expand greatly for a net present value of $29 million. The firm could build a medium-size facility as a hedge: If demand turns out to be low, its net present value is estimated at $18 million; if demand turns out to be high, the firm could do nothing and realize a net present value of $28 million, or it could expand and realize a net present value of $27 million.

If the firm builds a large facility and demand is low, the net present value will be -$12 million, whereas high demand will result in a net present value of $32 million.

Instructions for Submission:

1. Draw a Decision Tree Diagram for this problem.

2. Select the best alternative for this problem.