Question
The operations manager of Staples Inc. is deciding whether to invest in buying one machine or two machines now, for the production of a new
The operations manager of Staples Inc. is deciding whether to invest in buying one machine or two machines now, for the production of a new product. If only one machine is purchased and the demand is deemed high, the second machine can be purchased later. The probabilities of low demand and high demand are estimated to be 0.60 and 0.40, respectively. If the manager purchases two machines now, the company will have a net gain of $80,000 if the demand is low, and $180,000 if the demand is high. If the manager purchases one machine now, the net gain of the company is $100,000 if the demand is low. In case the demand is high, the manager can decide one of the following three options: 1. Do nothing and the net gain remains at $100,000. 2. Subcontract to another company, and the net gain is $165,000 with this option. 3. Purchase a second machine, and the net gain is $150,000 with this option. Draw a decision tree for this problem, and determine the optimal decision the operations manager have to make based upon the EMV criterion.
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