An oil palm industry company is considering two corporate strategies: the company's current expansion to produce downstream products or buy new land to build a new plant. Each of these decisions needs to be decided precisely because this really determines the condition of the company and depends on future market conditions. The decision that the company needs to make is to expand or buy new land. If the company does expand, 2 states of nature will be possible to happen namely the market will grow (probability 0.60) or the market will not grow (0.40). Each state of nature will produce a payoff. If the company decides to buy new land, in the next three years a decision also needs to be taken. In decision node 1, the alternative decision is to expand or buy new land whose costs are $ 800,000 and $ 200,000, respectively. If the company decides to expand, 2 states of nature will allow this to happen, namely the market will grow with probability 0.6 or the market will not grow with probability 0.4. If the market grows, the company will receive a payoff of $ 2,000,000 in ten years but if the market does not grow, the company will only receive $ 225,000. If the company chooses to buy new land, 2 states of nature are also possible to occur at node 3. States of nature at node 3 is also the same as node 2 with different payoff values. If the market grows, no payoff will be received, but the company will make another decision on node 4 to develop the land. At node 4, the choice is land will be developed at a cost of $ 800,000 or land will be sold at a payoff of 450,000. The situation at node 4 will only occur if there is a growing market condition.

If the company does not grow on node 3, no payoff will be received, but a new decision will be needed on node 5. The alternative decision on node 5 is that the warehouse will be built at a cost of $ 600,000 or the land will be sold at $ 210,000 (Notice that the sale of the land result in less profit it there is no market growth than if there is growth). Furthermore, if the decision taken at node 4 is expand, then 2 states of nature are possible, that is, the market will grow higher (and the probability of no growth is lower) than before because the market has grown in the previous three years as seen on node 3 to node 4. The payoff for these 2 states of nature is $ 3,000,000 and $ 700,000 respectively. If the company decides to build a warehouse on node 5, then 2 states of nature are possible, the market will grow with a probability of 0.30 and a payoff of $ 2,300,000 or the market will not grow with a probability of 0.70 and a payoff of $ 1,000,000. On this occasion, market growth was low (0.30) because in the previous node no good market growth was found.

Question:

a Please design the decision tree according to the problem above with the provisions of the node and the rules given

b. Which alternative decisions does the company need to make? Is it expanding or buying new land? Complete with clear calculations.

o Pay of 3 Years 10 years Growth (0.6) $2,000,000 120.000 Expand (0.6) (5800,000 EV 0.6 $2,000,000)H0.4$225,000) EV $1.290,000 10 11 EV0.6$1,290,000 EV-5774,000-800,000 EV26,000 Not growth (04) $225,000 13 14 15 16 17 1 19 EV $112,000 Growth (07) $3,000,000 22 EV $2,310,000 Expand (5800,0001 EV 0.7 $3,000,000)+10.8 5700,000) EV-$2,310,000 EV 2,310,00-800,000 EV $ 1,510,000 EV$1,510,000 Growth (06) No Growth (0.3) 3: $700,000 EV-$1,222,000 Buy land (04) $200,000 EV.0.651,510,000 EV5906,000 Selland EVS 450,000 EV 0.651,510,000)0.4*790,000) EV $1,222,000 Build warehouse -600,00 EV0.4*1,222,000 EV-488,800-200,000 IV.288,800 $450,000 Growth (0.3) $2,300,000 EV 0.3'2300000)-0.77,000,000) EV 1,390,000 No growth (0.7) $1,000,000 EV 1,390,000-600,000 EV $790,000 EV.790,000 No growth 0.41 EX EV.0.4'210,000 EV 584,000 Sell land $210,000 Sheet1 + o Pay of 3 Years 10 years Growth (0.6) $2,000,000 120.000 Expand (0.6) (5800,000 EV 0.6 $2,000,000)H0.4$225,000) EV $1.290,000 10 11 EV0.6$1,290,000 EV-5774,000-800,000 EV26,000 Not growth (04) $225,000 13 14 15 16 17 1 19 EV $112,000 Growth (07) $3,000,000 22 EV $2,310,000 Expand (5800,0001 EV 0.7 $3,000,000)+10.8 5700,000) EV-$2,310,000 EV 2,310,00-800,000 EV $ 1,510,000 EV$1,510,000 Growth (06) No Growth (0.3) 3: $700,000 EV-$1,222,000 Buy land (04) $200,000 EV.0.651,510,000 EV5906,000 Selland EVS 450,000 EV 0.651,510,000)0.4*790,000) EV $1,222,000 Build warehouse -600,00 EV0.4*1,222,000 EV-488,800-200,000 IV.288,800 $450,000 Growth (0.3) $2,300,000 EV 0.3'2300000)-0.77,000,000) EV 1,390,000 No growth (0.7) $1,000,000 EV 1,390,000-600,000 EV $790,000 EV.790,000 No growth 0.41 EX EV.0.4'210,000 EV 584,000 Sell land $210,000 Sheet1 +