Getz wants to develop a completed and solved decision tree.

APPROACH c The payoffs are placed at the right-hand side of each of the tree’s branches (see Figure A.2). The probabilities (first used by Getz in Example A4) are placed in parentheses next to each state of nature. The expected monetary values for each state-of-nature node are then calculated and placed by their respective nodes. The EMV of the first node is $48,000. This represents the branch from the decision node to “construct a large plant.” The EMV for node 2, to “construct a small plant,” is

$52,000. The option of “doing nothing” has, of course, a payoff of $0.

Getz Products wishes to develop the new tree for this sequential decision.
APPROACH c Examining the tree in Figure A.3, we see that Getz’s first decision point is whether to conduct the $10,000 market survey. If it chooses not to do the study (the lower part of the tree), it can either build a large plant, a small plant, or no plant. This is Getz’s second decision point. If the decision is to build, the market will be either favorable (0.6 probability) or unfavorable (0.4 probability). The payoffs for each of the possible consequences are listed along the right-hand side. As a matter of fact, this lower portion of Getz’s tree is identical to the simpler decision tree shown in Figure A.2.

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EMV for node 1 = $48,000 =(0.6) ($200,000) + (0.4) (-$180,000) Favorable market (0.6) Payoffs Construct large plant $200,000 Unfavorable market (0.4) Construct small plant Favorable market (0.6) -$180,000 Do nothing $100,000 Unfavorable market (0.4) 20,000 EMV for node 2 = $52,000 =(0.6) ($100,000) + (0.4) (-$20,000) $0 90