Reference no: EM13977665

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 demands turn 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 $27 million

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

1.  Draw a decision tree diagram for this problem

2. Analyze and solve the Tree Diagram to evaluate the alternatives.  Select the best alternative