HW - Ch 3. Making choices Problem 1 Business expansion Mr. Clinton is considering business expansion. At present, there are two choices: building a new plant with the state-of-the-art technology; expanding the current production capacity. If he chooses building a new plant, the return is likely to be either $130m with a probability of 40% (in case of successful implementation), or $40m with a probability of 60% (in case of poor implementation). Expanding the current capacity has two possibilities, either successful or poor, with equal likelihood. In case of poor implementation, the return is expected to be $30m. If the capacity expansion is successilly implemented, he has two subsequent choices: upgrade the production technology or keep the current technology. Upon upgrading the technology, the return is going to be either $120m with a probability of 50% or $60m with a probability of 50%. Keeping the current technology is going to produce a return of $100m. (a) Illustrate the above decision situation using a decision tree. (b) You can identify three strategies from the problem. Explain these three strategies. (e) Create risk proles and cumulative risk proles for the above three strategies. Is there a deterministic or stochastic dominance relationship