Decision tree help
Janis Corporation
The Janis Corporation is involved with waste management and, during the past 10 years, has become one of the largest waste disposal companies in the Midwest, serving primarily Wisconsin, Illinois, and Michigan. The company is currently considering establishing a waste treatment plant in Mississippi as well. From past experience, the company estimates that a small treatment plant in northern Mississippi would yield a $500,000 profit contribution or return regardless of the market demand for the facility. The success of a medium-sized treatment plant would, however, depend on the market. With a low demand for waste treatment, the company estimates a $200,000 contribution or return for a medium-sized facility. A medium demand would return $700,000 and high demand would return $800,000. Although establishing a large treatment facility is significantly riskier, the potential return is similarly greater. With a high demand for waste treatment in Mississippi, a large facility should return a million dollars. Medium demand would return only $400,000 given establishment of a large facility and low demand would return a loss of $200,000.
Considering the economic conditions for northern Mississippi and the experience Janis Corporation has in the field, the company estimates the probability of low demand for waste treatment in the proposed area to be 0.15. Similarly, the probability for medium demand and high demand are estimated to be 0.40 and 0.45 respectively. Because of the large potential investment and possibility of a loss, the company is also considering hiring a market research firm based in Jackson, Mississippi. The market research firm is experienced in establishing demand characteristics for large municipal projects in the state and would conduct a survey to collect data with respect to the probability of low, medium, and high demand for waste treatment services in the region. The cost of the survey is $50,000 and the firm has provided Janis Corporation with a track record for comparable survey results in the following table:
Possible Outcomes Historical Survey Results for Demand
Low Medium High
Low Demand 0.7 0.2 0.1
Medium Demand 0.4 0.5 0.1
High Demand 0.1 0.3 0.6
These are the questions:
a. Develop a decision tree or complete payoff tables to represent the alternatives and outcomes for this problem.
b. Use the expected value approach to recommend which alternative Janis Corporation should follow in order to maximize expected profit contribution or return. Provide a complete narrative of all steps taken in the decision process and the justification for the indicated recommendation.