TriStar plans to open a new plant in Arkansas. The company can open a full-size plant now or a small-size plant that can be expanded 2 years later if warranted by high demand. The time horizon for the decision problem is 10 years. TriStar estimates that the probabilities for high and low demands over the next 10 years are .75 and .25, respectively. The cost of immediate construction is $5 million for a large plant and

$1 million for a small plant. The expansion cost of a small plant 2 years from now is

$4.2 million. The income from the operation over the next 10 years is given in the following table:

Annual income estimates (in $1,000)
Alternative High demand Low demand Full-size plant now 1000 300 Small-size plant now 250 200 Expanded plant in 2 years 900 200

(a) Develop the associated decision tree, given that after 2 years TriStar has the option to expand or not expand the small plant.

(b) Develop a construction strategy for TriStar over the next 10 years. (For simplicity, ignore the time value of money.)