The expense involved in developing the initial molds

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You are considering the possibility of starting a company to produce sailboats. Because of the expense involved in developing the initial molds and acquiring the necessary equipment to produce the boats, you have decided to conduct a market study to make sure that the market for the boats will be adequate. You estimate that the market study will cost you $10,000. Furthermore, the market study can be either successful or not successful. Your basic decisions are to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favorable market, you can expect to make $90,000 from large facility or $60,000 from the smaller facility. If the market is unfavorable, you would lose $30,000 with a large facility, and lose $20,000 with a small facility. You estimate that the probability of a favorable market, given a successful market study result, is estimated to be 0.8. The probability of an unfavorable market, given an unsuccessful market study result, is estimated to be 0.9. You feel that there is a 50-50 chance that the market study will be successful. You may bypass the market study and simply make the decision whether to build a large plant, a small plant, or no facility at all. Without doing any market study, you estimate the probability of a successful market is 0.6. Build a decision tree and make your decision.

Reference no: EM131147644

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