A manufacturing plant has reached full capacity. The company must build a second plant—either small or large—at a nearby location. The demand is likely to be high or low. The probability of low demand is 03. If demand is low, the large plant has a present value of $5 million and the small plant, $8 million. If demand is high, the large plant pays off with a present value of $18 million and the small plant with a present value of only $10 million. However, the small plant can be expanded later if demand proves to be high, for a pie- sent value of $14 million.

a. Draw a decision tree for this problem.

b. What should management do to achieve the highest expected payoff?