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An entrepreneur must decide whether to build a small plant or a large plant at a new location. Demand at the location can be
An entrepreneur must decide whether to build a small plant or a large plant at a new location. Demand at the location can be either small or large, with probabilities estimated to be 0.4 and 0.6 respectively. If a small plant is built, and demand is large, the civil engineer may choose to maintain the current size or to expand. The net present value of profits is RM223,000 if the entrepreneur chooses not to expand. However, if the entrepreneur chooses to expand, there is a 50% chance that the net present value of the returns will be RM330,000 and 50% chance the estimated net present value of profits will be RM210,000. If a small plant is built and demand is small, there is no reason to expand and the net present value of the profits is RM200,000. However, if a large plant is built and the demand turns out to be small, the choice is to do nothing with a net present value of RM40,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability of 0.3 or favorable with a of 0.7. If the response to advertising is modest the net present M20,000. However, if the response to advertising is favorable, t ue of the profits is RM220,000. Finally, when the large plant I happens to be high, the net present value of the profits RM800, cision tree for the scenario above and give your recommendation is the best.
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