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Knowledge Co. is considering the acquisition of a production process that will produce a new organic charcoal (biochar) that will have extensive benefits to the
Knowledge Co. is considering the acquisition of a production process that will produce a new organic charcoal (biochar) that will have extensive benefits to the environment if it is of the highest quality. The expected net income for the company if biochar is of the highest quality is 10 million. There will be a net loss of 4 million if biochar is not of the highest quality. The supplier of the production process has reported that in the past, 70% of the time the process has obtained highest-quality biochar. The production manager knows of a testing that can be done to the process to obtain a better estimate about the quality of the biochar it will produce, this testing costs $200,000.- and it will indicate if the process will obtain biochar of the highest quality or if it will not. It is known that this testing has a 65% chance of correctly predicting that biochar will be of the highest quality and it has an 85% chance of correctly predicting that biochar will not be of the highest quality. In case the company decides not to acquire the production process that will produce biochar, there is the option of importing (or not importing) biochar for its distribution in Mexico. In this case (when importing only) the company is contemplating two scenarios: that biochar is successful or that biochar is not successful in Mexico. If the imported biochar is successful the company will have a net income of 4 million, if the company decides to import it and it is not successful the company will incur a net loss of one million. Due to the lack of information about sales of imported biochar, the marketing department considers an equal probability for biochar being successful or not in Mexico. . Construct and solve a Decision Tree to determine the optimal policy for Knowledge Co. very clearly state that optimal policy including its expected value. Make sure to clearly show the probableties and costs you are considering in each branch
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