Question: A company manufactures stamped steel products. Increasingly, foreign producers are undercutting the company's prices for these stampings, and the company is studying the technology of its production capacity to determine if it should be upgraded (automated) to become competitive with the foreign firms.
If the production processes are automated, the net present value of the returns (net present value means that the returns are expressed in terms of today's dollars) to the company is dependent on the market for the plant's products.
Market Level Probability Payoffs
High 0.1 $4,000,000
Medium 0.5 $2,600,000
Low 0.4 $1,500,000
If the company decides to do nothing now and review the situation in five years, two alternatives will probably be present then - continue operating with the existing production processes or shut the plant down and liquidate its assets. If the plant continues to be operated in its existing condition after five years, the net present value of the returns is dependent on the market for the plant's products at that time:
Market Level Probability Payoffs
High 0.3 $3,000,000
Medium 0.4 $2,500,000
Low 0.3 $2,000,000
If the company shuts the plant down and liquidates its assets after five years, the net present value of the returns is estimated to be $2,000,000.
Use decision tree analysis and recommend a course of action for the company.