Considering the possibility of building additional factory

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Reference no: EM131124560

Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three alternatives: build small plant, build large plant, and do nothing. If the company builds the small plant and the demand for the new product is low, then the company expects to receive $10 million in discounted revenues (present value of future revenues) and incur $7 million in discounted costs (initial construction costs plus present value of future cost). If the company builds the small plant and the demand for the new product is high, then the company expects to receive $12 million in discounted revenues and incur $8 million in discounted costs. If the company builds the large plant and the demand for the new product is low, then the company expects to receive $10 million in discounted revenues and incur $9 million in discounted costs. If the company builds the large plant and the demand for the new product is high, then the company expects to receive $14 million in discounted revenues and incur $10 million in discounted costs. If the company does nothing, then no additional revenue would be generated nor additional cost incurred because the current factories cannot produce these new products. Regardless of what alternative the company implements, the probability of demand for the new product being high is 0.40 and the probability of demand for the new product being low is 0.60. Construct a decision tree to help Expando make the best decision. What is the best decision?

Reference no: EM131124560

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