A manufacturing plant has reached full capacity. The company must build a second plant - either small or large at a nearby location. The demand is likely to be high or low. The probability of low demand is 0.3. If demand is low, the large plant has a present value of $5 million and the small plant, $8 million. If demand is high, the large plant pays off with a present value of of $18 million and the small plant with a present value of $10 million. However, the small plant can be expaned later if demand proves to be high, yielding a present value of $14 million return.
Draw a decision tree and solve to determine what management should do to obtain the highest expected value.