Quanatative Analysis Homework-One problem

Problem 3

Planwell Corporation

Planwell Corporation is considering whether to build a large plant or a small plant for new product, which has an estimated life of 7 years.  A small plant requires an investment of $3.4 million and a large plant of $4 million.  The following estimates are available for annual income.

Plant Size

Demand

Annual Income

Large

High

$900,000

 

Low

$300,000

Small

High

$600,000

 

Low

$500,000

The probability of high demand in first year is 0.75.  If the demand is high in the first year, the probabilities of high and low demands in subsequent years are 0.7 and 0.3 respectively.  The probability of low demand in the first year is 0.25.  If the demand is low in the first year, the probabilities of high and low demands in subsequent years are 0.2 and 0.8 respectively.

Evaluate the decision alternatives open to the company using decision trees.  Which alternative should be followed by the Planwell Company and what return can be expected?

 


Use this space for the Decision Tree

 

Decision Tree for Planwell Corporation

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