Refer to Problem 13. In the previous decision situation, the owner, Sanjay Kumar, decided to build a small facility. After operating the facility for a year, Sanjay realized that the market growth potential for his company’s new line of electronic products during the next eight years was significant. The initial decision that Sanjay has to make now is whether to expand the existing facility or purchase land to build a new facility three years into the future if the market growth continues to remain favorable. The probability of favorable market growth is 0.6. Favorable market growth after expanding the current facility will provide a payoff of $500,000. No market growth after the expansion will lead to a payoff of –$100,000. If the initial decision is to purchase land, and the market growth continues to remain favorable, Sanjay can build a second facility or sell the land. Building a second facility under favorable market-growth conditions will provide the company a payoff of $1,000,000. Selling the land under these conditions will generate a $400,000 payoff. Nevertheless, if the market growth is not favorable, Sanjay has the option of selling the purchased land for $170,000. Or, he can build a warehouse that will give him a payoff of $300,000. Depending on the options Sanjay chooses, the company will incur the following costs:

• Initial expansion: $100,000
• Land purchase: $150,000
• Building a second facility: $250,000
• Building a warehouse: $120,000

What should Sanjay do? Analyze the problem using a decision tree.

Data from problem 13

Kumar Electronics is planning to introduce a new line of electronic products it plans to market and sell in India. Sanjay Kumar, the owner, is trying to decide whether to build a small or large manufacturing facility in his hometown of Jodhpur. High demand for the new line of products and a large facility will generate a net profit of $600,000. Building a small facility and then experiencing high demand will provide a net profit of $250,000. Yet, if a large facility is built and the demand turns out to be low, Sanjay will lose $200,000. A small facility and low demand will result in a net profit of $100,000. The probability of the demand being low is 0.4, and the probability of it being high is 0.6: