Black River Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large premises at a prime location. Small premises would cost R300 000 to build and large premises would cost R550 000. Regardless of the type of premises built, if high demand exists then the net income is expected to be R1 500 000. Alternatively, if low demand exists, then net income is expected to be R600 000. If large premises are built then the probability of high demand is 0.75. If the smaller premises are built then the probability of high demand falls to 0.6. Black River has the option of undertaking a survey costing R50 000. The survey predicts whether there is likely to be a good or bad response to the size of the premises. The likelihood of there being a good response, from previous surveys, has been estimated at 0.8. If the survey indicates a good response then the company will build the large premises. If the survey does give a good result then the probability that there will be high demand from the large premises increases to 0.95. If the survey indicates a bad response then the company will abandon all expansion plans.

Required:

Using Expected Value Analysis, establish the best course of action for Black River Limited.