Baby Bear Beads (BBB) found themselves confronting a decision problem when a packaging line suffered a major breakdown. Ross, the manager of maintenance, Rita, plant manager, and Ravi, the company president, met to discuss the problem.
Ross reported that the current line could be repaired, but the cost and result were uncertain. He estimated that for $40 000, there was a 75% chance the line would be as good as new. Otherwise, an extra $100 000 would have to be spent to achieve the same result.
Rita's studies suggested that for $90 000, the whole line might be replaced by a new piece of equipment. However, there was a 40% chance an extra $20 000 might be required to modify downstream operations to accept a slightly different package size.
Ravi, who had reviewed his sales projections, revealed that there was a 30% chance the production line would no longer be required anyway, but that this wouldn't be known until after a replacement decision was made. Rita then pointed out that there was an 80% chance the new equipment she proposed could easily be adapted to other purposes, so that the investment, including the modifications to downstream operations, could be completely recovered even if the line was no longer needed. On the other hand, the repaired packing line would have to be scrapped with essentially no recovery of the costs.
The present worth of the benefit of having the line running is $150 000. Use decision tree analysis to determine what BBB should do about the packaging line.