Reference no: EM131152374
TCMC Case Study The Twin Cities Minto Corporation (TCMC) was founded eight years ago and has become the largest waste disposal management company in Minnesota. Jim Minto, the founder and CEO, is considering the prospect of launching a waste treatment plant in the metropolitan area of Minneapolis, Minnesota. He hired Manguto Corporation to conduct feasibility studies for him for each of three plant sizes: a small, medium, and large facility. Manguto's summary report was that a small-sized plant would provide fixed profitability regardless of market conditions, while the profitability for a medium and large plant depends on market conditions. Particularly, the report indicated that a small-sized plant would yield a fixed return of $5,000,000 profit regardless of the market for the facility. With a low demand for waste treatment, Jim would expect a $2,000,000 return. A moderate demand would yield a return of $7,000,000 and a high demand a return of $8,000,000. The report indicated that the potential profitability for a large plant is much greater, but also warned that it is much riskier; TCMC could potentially lose money if the demand were low. Specifically, with a moderate demand a large plant would have a profit return potential of $8,000,000, and $10,000,000 with a high demand. However, TCMC, would potentially lose $2,000,000 with a large plant if demand were low. Manguto also assessed the economic conditions in Minnesota for chances of low, moderate, and high demand. They estimated the probability for a low demand for plants to be 20%, the probability for a moderate demand 40%, and the probability of a high demand 40%. After carefully studying the report, Jim was enticed by the significant profit margin of return, but was also cautious about the potential for a loss. As astute as he is, Jim contemplated conducting a market survey to determine favorability given demand type. The survey would cost Jim $100,000. He contacted K. W. Analytics and Research to consider performing a market survey to get a better feel for the market demand. K. W. Analytics had done similar work for a company in a nearby state in the past. To help Jim to go ahead with the survey, K. W. provided the following conditional probabilities: a survey with unfavorable (low) results means that a low demand is likely, favorable (moderate) means a moderate demand is likely, and highly favorable (high) means a high demand is likely. Problem (survey results/possible demand) Favorability of Survey Results Possible Demand Unfavorable (Low) Favorable (Moderate) Highly Favorable (High) Low 0.6 0.3 0.1 Moderate 0.3 0.5 0.2 High 0.1 0.4 0.5 Deliverable Conduct a decision analysis and make a recommendation to Jim and TCMC on whether or not they should conduct a survey, along with what size plant they should build. Here are things to consider in regards to the analysis and recommendation. Note that the root of the problem is whether or not to conduct a survey.
1 - Develop a decision tree for this case, without a survey. Note: You need to create branches for deciding whether to build a small, medium, or large facility. Extending from these decision branches are three possible demands, representing the possible states of nature (low, moderate, high). Determine the expected monetary value (EMV) for each plant size. Explain which plant size will provide the highest monetary value.
2- Develop a decision tree for the case, with a survey. Note: You will need to consider all possibilities. Use the survey results as the root. There are three main decisions to be made: for building a small, medium, or large facility. Extending from these decision branches are three possible demands, representing the possible states of nature (low, moderate, high). Determine the expected monetary value (EMV) for each plant size. Explain which plant size will provide the highest monetary value. Calculate overall EMV with the survey.
3 -Compare the EMVs for the two cases: with and without a survey. Which will provide the highest EMV? Which would be the recommended plant size?
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