3. A young company has been successful in its first two years of operation and is planning to open a second location. Its management is trying to decide whether to build a small, medium, or large facility. The level of demand at the new facility can be described as poor, moderate, or good, with the probability for poor of 0.20, for moderate of 0.55, and for good of 0.25. If a large facility is built and business is good, the net present worth of the after- tax earnings is estimated to be $175,000. If business is moderate for the large facility, the PW will be $100,000; and if business is poor, the facility will lose a PW of $50,000. A medium-sized facility will lose a PW of $20,000 if business is poor and will make a PW of $110,000 if business is moderate. If business is good, the medium-sized facility is expected to earn a PW of $120,000, or it can be enlarged at a cost of $50,000 to earn a PW of $165,000 before the cost of the expansion is deducted. A small facility is estimated to earn a PW of $15,000 if business is poor. If business is moderate, the small facility is expected to earn a net PW of $60,000, or it can be en- larged moderately at a cost of $40,000 to earn a PW of $90,000 before the cost of the enlargement is deducted. If business is good, the small facility will earn a PW of $60,000, or it can be enlarged moderately at a cost of $40,000 to earn $90,000 (as above) or greatly at a cost of $60,000 to earn a PW of $160,000 before the cost of the expansion is deducted.

a. Draw the decision tree for this decision.

b. Decide what the company should do to achieve the highest EMV.