Recyclops Corporation has grown to become of the largest recycling operations in the northeast, serving parts of Pennsylvania, New York, and New Jersey. Dwight Schrute, president and CEO is considering expanding recycling operations into Rhode Island. Dwight believes that a small facility in northern Mississippi would yield a $650,000 profit regardless of the market for the facility. The success of a medium-sized recycling facility would depend on the market. With a low demand for recycling, Dwight expects a $260,000 retum. Dwight estimates that a medium demand would yield a $910,000 and high demand would yield $1,040,000. Although a large facility is riskier, the potential return is greater. With a high demand for recycling in the region, the large facility should return $1,300,000. With a medium demand, the large facility should return only $400,000. Dwight expects to lose $260,000 on the deal if he builds the large facility if demand is low. Economic projections for the region led Dwight to estimate the probability of a low demand at 0.15, medium demand at 0.35, and high demand at 0.5 To get a better feel for the demand for recycling operations in the region, Dwight has considered hiring the Michael Scott Consulting Company to conduct a survey of potential customers. The cost of the survey is $50,000. MSCC has provided the following information about past survey results Survey Results Possible Outcome Low Demand Medium Demand High Demand Low Medium Surv 0.7 0.4 0.1 0.2 0.5 0.3 0.1 0.1 .6 The survey could result in three possible outcomes, with low survey indicating low demand and high survey indicating high demand As the assistant to the president, you have been tasked with developing a decision strategy for this scenario. Build and solve a decision tree Identify the optimal strategy Comment on model sensitivity, especially to changes in Dwight's initial estimates of market demand Calculate and discuss EVPl and EVSI Recyclops Corporation has grown to become of the largest recycling operations in the northeast, serving parts of Pennsylvania, New York, and New Jersey. Dwight Schrute, president and CEO is considering expanding recycling operations into Rhode Island. Dwight believes that a small facility in northern Mississippi would yield a $650,000 profit regardless of the market for the facility. The success of a medium-sized recycling facility would depend on the market. With a low demand for recycling, Dwight expects a $260,000 retum. Dwight estimates that a medium demand would yield a $910,000 and high demand would yield $1,040,000. Although a large facility is riskier, the potential return is greater. With a high demand for recycling in the region, the large facility should return $1,300,000. With a medium demand, the large facility should return only $400,000. Dwight expects to lose $260,000 on the deal if he builds the large facility if demand is low. Economic projections for the region led Dwight to estimate the probability of a low demand at 0.15, medium demand at 0.35, and high demand at 0.5 To get a better feel for the demand for recycling operations in the region, Dwight has considered hiring the Michael Scott Consulting Company to conduct a survey of potential customers. The cost of the survey is $50,000. MSCC has provided the following information about past survey results Survey Results Possible Outcome Low Demand Medium Demand High Demand Low Medium Surv 0.7 0.4 0.1 0.2 0.5 0.3 0.1 0.1 .6 The survey could result in three possible outcomes, with low survey indicating low demand and high survey indicating high demand As the assistant to the president, you have been tasked with developing a decision strategy for this scenario. Build and solve a decision tree Identify the optimal strategy Comment on model sensitivity, especially to changes in Dwight's initial estimates of market demand Calculate and discuss EVPl and EVSI
