Question
A company is considering expansion of its current facility to meet increasing demand. A major expansion would cost $500K, while a minor expansion would cost
A company is considering expansion of its current facility to meet increasing demand. A major expansion would cost $500K, while a minor expansion would cost $200K (K for thousands). If demand is high in the future, the major expansion would result in an additional profit of $900K, but if demand is low, then there would be a loss of $500K. If demand is high, the minor expansion will result in an increase in profits of $300K, but if demand is low, then there is a loss of $100K. Construct a payoff table for the company.
Show your calculation steps below. Show your calculation steps below.
(b) For what probability of a high demand will the company be indifferent between the two expansion alternatives? Hint: Let X = probability of high demand. ___________________________________________________________________________________________
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