Problem:

You are a manager at a certain factory that designs small gadgets. The factory has been quite successful in the past years. Your CEO is wondering whether or not it is a good idea to expand the factory this year. The cost to expand the factory is $1.5M. Doing nothing will result in expected $3M in revenue if the economy stays good and people continue to buy plenty of gadgets, but only $1M in revenue is expected if the economy is bad.

On the other hand, expanding the factory carries and expected $6M in revenue if economy is good and $2M if the economy is bad.

Assume there is a 40% chance of a good economy and a 60% chance of a bad economy. Also, assume the costs of operating the factory account to $.5M if the factory is expanded and $.3M if not.

a. Illustrate a Decision Tree showing these choices.

b. What should you do?