A company specializing in earth-moving equipment is contemplating expanding its operations. It must decide whether to build a large plant or a small plant.
There is a 60% chance that demand for the equipment will be strong and a 40% chance that demand will be weak. If a large plant is built, a profit of $10 million will result if demand is large. and a profit of only $1 million if demand is weak. If the company builds a small plant and the demand is weak, profits of $4 million will be made.
If demand is strong and the company has a small plant, the likelihood of competition is greater. Should there be competition arising in the company could either build another smaller plant in a different area or expand the existing plant. If the company decides not to invest in another plant, profits of $6 million is expected, whether there is competition or not.
If there is competition, either form of expansion is expected to yield a profit of $8 million with a70% probability, and a profit of $6 million with a 30% probability. If there is no competition, building a separate plant would yield a profit $9 million with a 80% probability and a profit of $7 million with a 20% probability.
Expanding the existing plant is expected to yield a profit of $7.5 million.
With the aid of a decision tree, prepare a quantitative report advising the company on the best course of action.