A software developing corporations has determined that it needs to expand its current capacity. The decision has come down whether to expand now with a large facility or to undertake small expansion.

Management has estimated the following:

• The demand when being high is 0.60
• The demand when being low is 0.40

Profits for each alternative have been estimated:

• Large expansion has an estimated profitability of either $1000 000 or $600 000, depending on whether demand turns out to be high or low.
• Small expansion has a profitability of $500 000 assuming that demand is low.
• Small expansion with an occurrence of high demand would require considering whether to expand further. If the company expands at that point, the profitability is expected to be $700 000. If it does not expand further, the profitability is expected to be $500 000.

Required:

1. Draw a DECISION TREE showing the decisions, chance events, and their probabilities, as well as the profitability of outcomes. (4 marks)
2. Compute the expected value of the small and large expansions. (6 marks)