A company sees three options for dealing with its expected growth: (1) relocate at a new premises, (2) expand its current operation, and (3) do nothing. Whatever choice is made, growth may be strong or weak. Managers have made assumptions, forecasts and estimates of the possibilities: 1. The time horizon is 5 years. 2. The probability of strong growth is 55%, so the probability of weak growth may be calculated. 3. Relocation: strong growth in a new site will yield annual income of 195,000 (to simplify matters, ignore the thousands, so use 195 all income figures are annual). Weak growth will result in income of 115. So over 5 years these figures will be 195 x 5 = 975 and 115 x 5 = 575. 4. Expansion: strong growth with expansion will provide income of 190 per year, whereas income will be 100 per year in the case of weak growth. 5. Do nothing: if the company does nothing, income will be 170 per year if there is strong growth and 105 per year with weak growth. 6. Expansion at the current site will incur a once-off cost of 87. 7. The once-off cost of relocation will be 210. 8. Operating costs are assumed to be the same for all options, so these may be ignored. 9. Relocation or expansion could be achieved quickly and no anticipated loss of revenue is envisaged during the actual relocation or expansion process. 10. Ignore the time value of money.

(a)What course of action would you advise the company to follow in order to maximise profit (income over the period less the relevant once-off cost)?

(b) If the company does nothing for the first year, and if growth is strong, it may then decide to expand from year 2 onwards. The high growth annual income figures for expansion would then apply for the four years from year 2 to year 5. If growth is strong and the existing site is expanded during the second year, the expansion will still cost 87. What would be your recommendation to maximise profit?

(c) Comment on the use of decision tree analysis in making the best decision for the firm in this example. What additional information might enhance the validity of decisions derived from a decision tree?