Question: Amanager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities
Amanager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.40,0.35, and 0.25, respectively. A small facility is expected to earn an after-tax net present value of just $12,000 if demand is low. If demand is average, the small facility is expected to earn $15,000; it can be increased to medium size to earn a net present value of $30,000. If demand is high, the small facility is expected to earn $25,000 and can be expanded to medium size to earn $40,000 or to large size to earn $100,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $110,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $155,000. If a large facility is built and demand is high, earnings are expected to be $160,000. If demand is average for the large facility, the present value is expected to be $100,000; if demand is low, the facility is expected to lose $80,000 Choose the correct decision tree below. Note that each payoff is given in thousands ($000). OA. OB. High 0.25 Aug 0.35 Expand to Irg Do nothing High 0.40 $160 $155 $150 Low 0.4 $100 $ Avg 0.36 $100 Low 0.25 $80 $ High 0.40 $ Expand to lng Large Large - $80 High 0.25 $ $155 Med Avg 0.35 Med Avg 0.35 $160 Low Dan $110 Low 0.25 $110 0.40 - $25 High 0.25 $25 High 0.40 Small Do nothing $150 Expand to Irg $100 Expand to med $40 Do nothing $25 Expand to med $30 Do nothing $15 Expand to lng $100 Expand to med 540 Do nothing $25 Expand to med $30 Do nothing $15 Small Avg 0.35 Avg 0.35 Low 0.40 $12 Low 0.25 $12 OC. OD. High 0.26 160 Low 0.4 $100 Expand to Ing High 0.25 $160 $ Arg 0.35 $100 Low 0.40 -$80 Large High 0.25 Med Avg 0.35 Expand to lng Aug 0.35 $ -$80 High 0.25 Avg 0.35 Large $155 $155 Do nothing Med Low 0.40 $110 $150 Low 0.4 $110 - $25 Expand to lng - $25 High 0.25 $100 Small Do nothing $150 Expand to Irg $100 Expand to med$40 Do nothing $25 $ Do nothing $15 High 0.25 Small Expand to med$40 Expand to media Expand to med 30 Avg 0.36 Avg 0.35 $ Low 0.40 912 Low 0.40 $12 Do nothing $15 What should management do to achieve the highest expected payoft? The management should build a in order to achieve the highest expected payoff of $ (Enter your response as a whole number.)
