A regional fast-food restaurant is considering an expansion program.The major factor influencing the success of such a program is the future level of interest rates.It is estimated that there is a 40 percent chance that interest rates will increase by 3 percentage points, a 35 percent chance that they will remain the same, and a 25 percent chance that they will decrease by 3 percentage points. The alternatives they are considering and possible payoffs are shown in the following table:
Rates Rates Rates
Increase No Change Decrease
Build 50 new places -$100,000 +$150,000 +$250,000
Build 25 new places -$80,000 +$100,000 +$180,000
Do Nothing -$50,000 +$50,000 +$125,000
Using decision tree analysis, calculate the expected value of each alternative, and decide which would be the best to follow.