Building big manufacturing plant-small manufacturing plant

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Reference no: EM132212224

A manufacturer may choose between building a big manufacturing plant or a small manufacturing plant for his products, but both take time to build so market demand will only be known later. A risky decision must be taken now to invest in a big or a small factory without knowing for certain if the market demand will be high or low by the time the factory comes into service. A small plant can be expanded if needed so a possibility is to start small, and once the demand is found to be big, the small plant can be expanded.

Cost of building large plant: 8 million

Cost of building small plant: 4 million

Cost of expansion from small to big: 5 million

Revenues from high demand and large or expanded plant: 20 million

Revenues from high demand and small plant: 10 million

Revenues from low demand: 5 million

Estimates are 70% probability of high demand

Create the decision tree and resolve what the best decision to make is.

Reference no: EM132212224

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