A manufacturer must decide whether to build a small or a large plant. Demand can be either weak or strong, with probabilities estimated to be 40% and 60%, respectively. If a small plant is built, and demand is strong, the production manager may choose to maintain the current size or to expand. The profit will be $223,000 if the firm chooses not to expand. However, if the firm chooses to expand, there is a 55% chance that the profit will be $330,000 and a 45% chance the profit will be $210,000. If a small plant is built and demand is weak, there is no reason to expand and the profit will be $200,000. However, if a large plant is built and the demand turns out to be weak, the choice is to do nothing with a profit of $40,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability of 30% or favorable with a probability of 70%. If the response to advertising is modest the profit will be $20,000. However, if the response to advertising is favorable, then the profit will be $220,000. Finally, if the large plant is built and the demand is strong, the profit will be $800,000.
REQUIRED: Use “Tree Plan” in excel to solve the problem and put the payoffs in the last column.