Problem $5-8($Algo$)$

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The

company is currently considering two options. The first is a small facility that it could build at a cost of $$8$ million. If demand for new

products is low, the company expects to receive $$10$ million in discounted revenues $($present value of future revenues$)$ with the small

facility. On the other hand, if demand is high, it expects $$12$ million in discounted revenues using the small facility. The second option is

to build a large factory at a cost of $$11$ million. Were demand to be low, the company would expect $$12$ million in discounted revenues

with the large plant. If demand is high, the company estimates that the discounted revenues would be $$16$ million. In either case, the

probability of demand being high is $0\mathrm{.}30,$ and the probability of it being low is $0\mathrm{.}70.$ Not constructing a new factory would result in no

additional revenue being generated because the current factories cannot produce these new products.

a$.$ Calculate the NPV for the following: $($Leave no cells blank $-$ be certain to enter $"0"$ wherever required. Enter your answers in

millions rounded to $1$ decimal place.$)$

b$.$ The best decision to help Expando is

to build the small facility.

to do nothing.

to build the large facility.Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $$7\mathrm{.}5$ million. If demand for new products is low, the company expects to receive $$12$ million in discounted revenues $($present value of future revenues$)$ with the small facility. On the other hand, if demand is high, it expects $$15$ million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $$10$ million. Were demand to be low, the company would expect $$12$ million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $$20$ million. In either case, the probability of demand being high is $\mathrm{.}35,$ and the probability of it being low is $\mathrm{.}65.$ Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision. a$)$ Which decision should Expando, Inc. make? b$)$ Why? Construct a decision tree to help Expando make the best decision.