A company has the options of building a full size plant or a small plant that can be expanded later. A market survey indicates that the probabilities of having a high and low demand over the next 10years are 0.75 and 0.25 respectively. The immediate construction of a large plant will cost Rs. 5 million and a small plant will cost only Rs. 1 million. The expansion of the small plant 2 years from now is estimated to cost Rs. 4.2 million. Estimates of annual income for each of the alternatives are given as follows:

-Full size plant and high demand will yield Rs. 1,000,000 annually.

-Full size plant and low demand will yield Rs. 300,000 annually.

-Small plant and low demand will yield Rs. 200,000 annually.

-Small plant and high demand will yield Rs. 250,000 annually.

-Expanded small plant with high demand will yield Rs. 900,000 annually.

-Expanded small plant with low demand will yield Rs. 200,000 annually.

Construct a decision tree and use it to advise the company on the best course of action.

(Note: Small plant with low demand after 2 years will not be expanded.)

QUESTION 3: [10 Marks] A company has the options of building a full size plant or a small plant that can be expanded later. A market survey indicates that the probabilities of having a high and low demand over the next 10years are 0.75 and 0.25 respectively. The immediate construction of a large plant will cost Rs. 5 million and a small plant will cost only Rs. 1 million. The expansion of the small plant 2 years from now is estimated to cost Rs. 4.2 million. Estimates of annual income for each of the alternatives are given as follows: - Full size plant and high demand will yield Rs. 1,000,000 annually. - Full size plant and low demand will yield Rs. 300,000 annually. - Small plant and low demand will yield Rs. 200,000 annually. - Small plant and high demand will yield Rs. 250,000 annually. - Expanded small plant with high demand will yield Rs. 900,000 annually. - Expanded small plant with low demand will yield Rs. 200,000 annually. Construct a decision tree and use it to advise the company on the best course of action. (Note: Small plant with low demand after 2 years will not be expanded.) 1