Question
Demand has grown at Dairy May Farms, and it is considering expanding. One option is to expand by purchasing a very large farm that will
Demand has grown at Dairy May Farms, and it is considering expanding. One option is to expand by purchasing a very large farm that will be able to meet expected future demand. Another option is to expand the current facility by a small amount now and take a wait-and-see attitude, with the possibility of a larger expansion in two years. Management has estimated the following chances for demand:
- The likelihood of demand being high is 0.76.
- The likelihood of demand being low is 0.24.
Profits for each alternative have been estimated as follows:
- Large expansion has an estimated profitability of either $50,800 or $27,500, depending on whether demand turns out to be high or low.
- Small expansion has a profitability of $16,000, assuming that demand is low.
- Small expansion with an occurrence of high demand would require considering whether to expand further. If the company expands at that point, the profitability is expected to be $38,300. If it does not expand further, the profitability is expected to be $11,490.
(b) Calculate expected values for large and small expansions. What should Dairy May Farms do?
EV small expansion = $enter expected value for small expansions in dollars
EV large expansion = $enter expected value for large expansions in dollars
Company sould opt select an option
expansion.
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